In his new memoir titled ‘Just A Mercenary? Notes from My Life and Career’, Duvvuri Subbarao candidly admits the mistakes he made as a civil servant and as RBI governor, including those on managing non-performing assets. Subbarao, a senior fellow at the Yale Jackson School, talks to Sunday Times about reworking the UPSC exam system, and why he questions the CAG’s ‘presumptive loss’ estimates in the 2G case. Excerpts:
Is it tougher being a civil servant today than 50 years ago?
I am not familiar with today’s civil service challenges and can’t presume to do a fair comparison. Today, poverty is lower and awareness levels as well as demand for accountability are higher compared to 50 years ago. The emphasis has accordingly shifted from poverty reduction to more responsive service delivery. Technology has transformed the logistics of administration. It also makes it possible to monitor field results more closely and make course corrections more swiftly. Apart from soft infrastructure, physical infrastructure too has improved which boosts productivity. Importantly, unlike in my time when civil servants were on average better educated than local politicians, today local politicians rival civil servants in terms of education, exposure and experience. The interaction, therefore, is on more even terms. That said, in spite of all these changes, some things are constant such as the commitment required of civil servants to the larger public good and the path of dharma.
Sanjeev Sanyal’s comment that the years of prep students put in for the civil services exam is a “waste of youthful energy” sparked off a debate. What is your take?
I agree with the broad sense of what Sanyal said although not with where he laid the blame. The civil service exam today is on average a ten-year project and the chances of success are low in a mathematical sense. Yet, youngsters keep going for it year after year as they succumb to ‘the sunk cost fallacy’. You can’t blame them, as Sanyal has done, for what is a very common human frailty. Instead, the remedy lies in reforming the exam system. These days, candidates get six attempts compared with just two in my time. In this system, those who can master the examination skill through repeated attempts get privileged over those with inherent talent. There is a case for reducing the number of eligible attempts so that youngsters are prevented from pursuing what may eventually be a futile endeavour.You have written about the discussion on effective revenue deficit, which was suggested by Mr Montek Singh Ahluwalia during UPA. One of the allegations against the UPA is accounting jugglery. Is it a valid criticism given what happened with accounting for oil bonds and FCI bonds?
For sure. In the book, I pointed out the conceptual flaw in effective revenue and effective fiscal deficits but I didn’t call it accounting jugglery. That said, I believe all governments and parties across board have been guilty of tampering with budget integrity through off-budget borrowing, deferred payments and hidden expenditures. This is self-defeating because people who make decisions based on these numbers are discerning enough to see through them. I think there is a strong case for the Centre and states to clean up the budget books in the larger public interest. In this context, I must commend the effort of the current finance minister Nirmala Sitharaman to improve transparency of budget numbers.You have suggested that it’s time to do away with some of the secrecy surrounding the budget and also remove ‘officialese’ in govt and RBI. How should it be done?
In a democracy, public opinion must feed into government decisions. A necessary condition for this is that the larger public understands the issues and the pros and cons of various alternatives. The responsibility of educating the public in this regard is on governments. In practice, what happens is the exact opposite. Government laws, rules, regulations and even the budget are written in such complex officialese that even educated people do not understand them. In effect, this amounts to governments failing their own people. I believe there is a strong case for governments and public institutions such as the RBI to translate their papers and documents into non-technical, plain language and make an extra effort to disseminate them. A ‘plain language movement’ is, in fact, gaining traction in many advanced economies and we should not be left behind.
You were finance secretary when the 2009 farm loan waiver was announced. Did it spoil repayment culture?
It was touted as a loan waiver to end all loan waivers. It turned out to be the exact opposite by setting off a series of loan waivers across states. All political parties are guilty of this, including the BJP which did a loan waiver in UP in 2017. There are many arguments against loan waivers, including the important one that it vitiates the credit culture in the economy. Decisions like this are driven by interest groups while the larger public does not even understand how it affects them. As I said above in the context of demystifying budgets, I believe there is a case for governments to put out a paper indicating the opportunity cost of such decisions so as to educate the public on the implications of these issues and generate an informed debate.
On 2G ‘presumptive loss’, you have questioned the logic. Did the CAG go into overdrive during that period?
I am disinclined to comment on overdrive because that is not part of my book. But as finance secretary, I was involved in the decision making on the pricing of spectrum and I wrote about that in the book. The prerogative of the CAG to do a special audit of spectrum pricing is unquestionable. However, its decision to go into the question of ‘presumptive loss’ to the government and the assumptions made in quantifying that loss are questionable on several grounds. Arguably, it’s possible to come out with a study that would in fact show ‘presumptive gains’ to the government by making assumptions that would be no less robust than those underlying the CAG methodology. More important than the estimate of presumptive loss, questionable as it was, is the CAG’s locus standi in questioning the right of the government to decide to sell spectrum at below market price. If a democratically elected government decides to sacrifice revenue to serve the larger public good of deepening telecom penetration, is it open to the CAG to substitute his own judgement for the government’s and call it a ‘presumptive loss’? If the CAG is allowed to enter into this issue, what could then stop him from going on to question every tax concession in the budget as a presumptive loss? Surely, that would diminish, not enhance, our democracy.
There are charges of “phone banking” to persuade bankers to give loans, which resulted in pressure on banks. This was the time when you were RBI governor. After the global financial crisis, there was also a special dispensation given to banks on loan classification. Did RBI pay enough attention to the build-up of NPAs at that time and was there pressure from govt to continue with the special regime for a longer period of time?
I must admit the NPA problem originated during my term at the RBI. If there was any ‘phone banking’, it was between the government and public sector banks, and I was not aware of it. But, I must say that although in public perception, the NPA problem is attributed to crony capitalism, there were many other reasons behind it. There were big investments going into infrastructure which was uncharted territory both for the corporates making the investments and the banks who were lending to them. There was irrational exuberance too as estimates of revenues and expenditure were being made as if the good times will roll on forever. There were Supreme Court orders on spectrum and coal block allocation and on mining which delayed projects and raised losses. Pressured on all sides, the government went into what was termed ‘policy paralysis’.
You spoke about exchange rate management towards the end of your term as RBI governor. Do you feel you were judged too harshly?
Criticism and judgement are par for the course when you are in a public policy position, and I can’t complain on that count. The major criticism against me was that I did not buy up dollars when there were huge capital inflows in 2010 and 2011 in the aftermath of quantitative easing in rich countries. I must admit that in relative terms, I was more ‘hands off’ than governors before me and after me. My policy bias was informed by several considerations. First, intervention is not costless. Second, by intervening in the forex market, the RBI is shifting the burden of adjustment from one segment of the economy to another. The fairness of doing that instead of allowing the market to operate freely is another consideration. Third, RBI’s stated policy is to intervene in the market only if there is ‘volatility’ in the exchange rate. Note though that, what is volatility is not defined. Given that opacity, it’s pretty much open for the RBI to act quite arbitrarily and defend that action as being consistent with the policy. I thought there was a need for the RBI to walk the talk. Most importantly, if RBI intervenes every time there is a sizeable movement in the exchange rate, markets will outsource their exchange rate risk management to the RBI. That will be a cosy moral hazard. There is a strong case for letting the markets learn to manage exchange rate fluctuations.
After the global financial crisis, you acknowledged that there was some delay in raising interest rates. What was the thinking then resulting in a delay, and, since there are comparisons, was the exit managed better post-Covid?
Experience from both developed countries as well as emerging economies since the global financial crisis (GFC) has shown that exit from an easy money policy is quite tricky in terms of both calibrating the trajectory as well as communication. In our own case, as I have admitted before, we were slower in reversing the crisis-driven easy money policy. But you must remember that we were operating in real time within the universe of knowledge available to us. For example, we were acting on real time data which showed that growth was slow whereas corrections afterwards showed that growth recovery was faster than we were led to believe. Also, we had to reckon with uncertainty in the global financial system triggered first by the global financial crisis and later by the eurozone sovereign debt crisis.
The financial instability following Covid was different from the financial instability following the Lehman collapse in many ways. The GFC originated in the financial sector and central banks had to be in the frontline finding a solution. In the case of Covid though, the origin was a cause outside the financial system and a solution had to come from science. Meanwhile, central banks had to maintain financial stability. That said, I believe the RBI handled the situation doing Covid and after it with great dexterity.
There have been differences between RBI and govt, starting with YV Reddy and P Chidambaram, between you and Chidambaram and Pranab Mukherjee, and then between Arun Jaitley and Urjit Patel and Raghuram Rajan. Has Shaktikanta Das learnt from his predecessors, and we do not see the tensions spilling over into the public domain?
Differences between governments and central banks are in some sense hardwired into the system. The rationale for central banks, in fact, is that maintaining financial and monetary stability requires some politically difficult decisions which cannot be left to governments which are driven by short-term political compulsions and electoral cycles. These differences are not unique to India. We have seen these differences play out in several countries. Recall that President Trump said things like ‘the Fed has gone crazy; ‘the Fed, and not China, is our number one enemy’. Senior President Bush blamed then Fed chairman Greenspan for losing his re-election.
There were differences between the government and the RBI here in our country too as you have recounted. What is important is that there be mechanisms for resolving these differences without allowing them to blow up and vitiate the policy atmosphere.
You asked about the current dispensation. I find it difficult to believe that there were no differences between the government and the RBI, but at least they managed them internally and quietly. Also, you must note that the fuel for friction is limited in the current context when growth is streaming along, inflation is low, the rupee is steady and financial stability is not a concern.
