C Rangarajan and India's economic reforms

 C Rangarajan was one of the principal figures in the making of India’s economic policies from the 1980s onwards. His memoir, Forks in the Road, should be compulsory reading for those who want a deeper understanding of the reform process.

It will interest IIMA students and alumni to know that Dr Rangarajan was a professor at the Institute for more than a decade and a half. He was at New York University School of Business (now Stern School) when Ravi Matthai, the then director, offered him a job at IIMA.

Dr Rangarajan’s course in Macroeconomics was hugely popular with students. He was entrusted with the task of launching IIMA’s doctoral program. In 1981, he was appointed Deputy Governor of RBI. Thereafter, there was no looking back.

Dr Rangarajan went on to don several hats: Member, Planning Commission; RBI Governor; Chairman, 12^th Finance Commission; Chairman, PM’s Economic Advisory Council. He was also Governor of two states and member, Rajya Sabha. A life of rich accomplishment!

My review article on the book in BS today.

It's behind a pay well, so here is the full text:

FINGER ON THE PULSE

 The ideas of economists

 Former RBI governor C Rangarajan’s memoir is a testament to the crucial role economists can play in shaping policies and people’s lives

T T Ram Mohan

Do economists matter? Can they make a big difference to public policy? Economists will find answers that are gratifying in Forks in the Road, the memoir of C Rangarajan ( ‘Ranga’ to old-timers at IIM Ahmedabad, with which he had a long association in its formative years). Yes, they do. And, yes, they can make a big difference to public policy, provided they can get political masters to align with their thinking. 

Dr Rangarajan’s memoir is about the economic events and decisions in which he was an active participant for nearly three decades, starting in the early 1980s. He wore several hats: Deputy governor and governor of the Reserve Bank of India (RBI); member of the Planning Commission; chairman of the Twelfth Finance Commission; and chairman of the Prime Minister’s Economic Advisory Council (with Cabinet rank). Somewhere in between were stints as governor of two states and member of the Rajya Sabha.

Unlike most memoirs, Dr Rangarajan’s is less about himself and more about issues. It is replete with tables and statistics. But it doesn’t just tell us what transpired. It examines the alternatives that were open to policymakers and explains why a particular course was chosen and what outcomes followed. The result is a fascinating piece of economic history. 

Dr Rangarajan joined the RBI in 1981. As deputy governor and governor (with a break in between), he dealt with two of India’s biggest balance of payments (BoP) crises,  the overhaul of monetary policy and banking reform. 

The first BoP crisis, in 1981, was handled largely within the then economic paradigm. Yet, operating  within the paradigm, Dr Rangarajan and his colleagues at the RBI managed a steady depreciation of the rupee in both nominal and real terms. They were very clear that it would be difficult to manage the current account deficit without boosting exports and curtailing imports.  The economists at RBI seem to have had a free hand in managing the exchange rate even before the reforms of 1991. 

Another significant reform in the 1980s arose from the Sukhamoy Chakravarty report of 1985. Following the report, monetary targeting or setting a money supply target consistent with output growth and prices came into vogue. This was the first attempt to tackle “fiscal dominance” over monetary policy. Here again, the political authority went along with the recommendations of the economists. 

The BoP crisis of 1991 required far more drastic measures. An immediate step was the raising of a foreign currency loan by pledging some of our gold reserves. The Chandra Shekhar government gave the go-ahead, and the Narasimha government that followed raised no objection. Again, a steep depreciation in the exchange rate of the rupee was required. This was done in two stages with the approval of the government. Yet another win for economists.

The achievement of the time, as is well known, was the radical break with the past that finance minister Manmohan Singh pushed through. Dr Rangarajan highlights the three significant breaks that are now part of economic lore: The dismantling of licenses, the reduction in public ownership of business enterprises, and the move away from the inward-looking trade policy of the past. All of this was possible only because of the backing of the political authority. Dr Rangarajan notes wryly that Narasimha Rao was able to rally his party behind him by talking of “continuation” in economic policy when there was really a break. At the time, Dr Rangarajan was at the Planning Commission.

Returning to the RBI in the early 1990s, Dr Rangarajan set in motion reforms in monetary policy and banking at a breath-taking pace. The phasing out of ad hoc Treasury bills; market-determined rates for government borrowing; the dismantling of the administered structure of interest rates in banking; the reduction in  the Statutory liquidity ratio and cash reserve ratio; licensing of new private banks; and a great deal more was done. The chapter is titled “The beginnings of autonomy” but  but the freedom given to the professional economists at RBI was not inconsiderable.

In the management of the external sector, the RBI worked closely with the finance ministry. Far-reaching reforms happened: Foreign institutional investors were allowed into the Indian stock market; foreign direct investment (FDI) norms were liberalised; and the exchange rate became largely market-determined. The framework for management of external capital flows was put in place. There was clarity that long-term equity flows should be preferred to short-term debt flows. These and other measures taken at the time have since become pillars of Indian economic policy. 

On all these, the political authority had no difficulty in heeding solid professional advice. There must have been occasions when the economists couldn’t quite have their way. Perhaps those occasions were not so consequential. At any rate, there is little indication in the memoir of any serious confrontation between economists and the government. On the major issues of policy, once the politicians had decided on a fundamental change of course, they didn’t interfere with the work of economists. On lesser, more technical matters, they always left it to the professionals to do what was required.

The big area of failure for economists has been the fiscal deficit or the savings-investment balance. Dr Rangarajan highlights the point in his concluding chapter, “Ruminations”, where he ponders the long-term outlook for the economy. Over the past three decades, it is an issue that has not proved amenable to the persuasions of economists, no matter what the complexion of government. We have since arrived at times when the global consensus on keeping public debt relatively low has been undermined. Economists themselves seem resigned to greater levels of public debt than they have been comfortable with in the past.

Not pushing through “big-bang” reforms— such as aggressive privatisation, including bank privatisation, land acquisition, and the freedom to hire and fire labour — is seen as a big political failure. Dr Rangarajan doesn’t seem to think so.  He makes little mention of these. “The reform regime,” he writes, “will be incremental in character. It has to be”. That is also the political consensus on reforms.  

Working quietly within the system, Dr Rangarajan was able to make a difference. His place as one of the principal architects of economic policy from the 1980s onwards is secure. For his compelling chronicle of the economic history of the period as much for his many contributions, he deserves a bouquet of the choicest roses.