After repetitive mess-ups in making appointments of significance, the government seems at last to have hit a home run in appointing Raghuram Rajan as the Reserve Bank of India (RBI) Governor. Suresh Kalmadi as CWG head, P.J. Thomas as Chief Vigilance Commissioner, the V.K. Singh affair or the Vinod Rai episode are among a string of examples where major appointments to positions that demand skills and probity have been turned into arenas for doling out patronage.
On the other hand, Rajan’s appointment - despite the avoidable scrap between the government and his predecessor, D. Subba Rao - seems to have been a clear winner. Most market observers have been happy to see Rao go, perceived as an obdurate, inflation obsessed, high-interest-rate man, oblivious to the economy’s growth demands. Apart from the approval in the pink press, the international media, think-tanks have all applauded the Rajan move to the RBI as a significant event for the Indian economy. Further, after Rajan took office, the ailing Indian Rupee (INR) has bounced back by about two per cent, and the equity markets were up by five per cent.
Now that the immediate news value of Rajan’s appointment and Rao’s rather peevish exit are behind us, it is time to deconstruct the events and examine if there are any policy lessons for the appointment making process. In making top appointments, we examine the recent quarrel, the past record, and future prospects for establishing a clearer process, especially for posts expected to impact public good. Specifically, the three questions explored here are:
- What was the recent quarrel between the Government of India and the RBI leadership before Rajan took charge all about?
- What does the past track record of high level appointments reveal about the criteria followed by the government?
- What are the prospects for institutionalising clear processes for high level appointments in order to stand external scrutiny so that accountability and public good are promoted?
The recent quarrel
What was the quarrel between the government of India and the Reserve Bank of India leadership all about before Rajan took charge? In his farewell talk Subba Rao said: “I do hope Finance Minister Chidambaram will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists’.” This may have been triggered by the Chidambaram comment: “If the government has to walk alone to face the challenge of growth, then we will walk alone.” The Finance Minister made these remarks in the context of RBI’s seeming reluctance to cut rates to stimulate growth.
Was this public quarrel a case of disappointed expectations, a personality problem, or a result of serious policy differences? In fact, if it really was about differences in policy perspectives, are India’s citizens not entitled to know? Did Subba Rao embark on policies that were unexpected at the time of his appointment or were they contrary to his known stand on monetary policy? What factors guided his selection as RBI governor in the first place? Were they based on a scrutiny of his written stand on issues or was it a reward for being a loyal senior civil servant – a reward that, in retrospect, was not paid back with gratitude?
Subba Rao belongs to the long list of Indian Adiministrative Service (IAS) officers who served as Governor of the RBI – S. Venkitramanan, Y. Venugopal Reddy to name a couple. As Finance Secretary, Rao (judged by various budget documents) had been a conventional economist, hung-up on the fiscal deficit and seeing in that a source of potential excess demand that could trigger inflation. There is nothing known if he (or his Minister or the Prime Minister) went deeper into understanding and examining how supply-side bottlenecks, especially third-rate infrastructure, could dampen productivity and hence escalate the pressure on prices. Nor are his views in public domain regarding the need to strengthen the debt market so that longer term finance can flow to infrastructure. More likely, in his appointment, the government may have expected a conventional inflation fighter who would hike interest rates, irrespective of the effects that would have on small businesses or first-time home buyers. What then went wrong between the principal and the agent? Did Rao do something unexpected? From a dispassionate study of his record, when faced with rising inflation, he raised rates and kept complaining about the fiscal deficit – as he was expected to do (and as his more famous predecessor, Venugopal Reddy, has also done).
Moreover, on the Rupee front too Subba Rao was not out of line with conventional wisdom. C. Rangarajan wisely proclaimed (of course after the fall) that an INR63 to the dollar is more or less in line with “true value”. If Subba Rao also thought so, he rightly did nothing while the Rupee was falling towards sixty to the dollar. Doing nothing was what his bosses would also have approved of if Rangarajan was correct. Thus, Subba Rao’s record and stated opinions show that there is no case for disappointed expectations. In fact, in addition to the expected monetary policy stance, Subba Rao’s deposition on the 2G scam pricing to the JPC was also mild (relative to the reported written position he had taken on file). So it is difficult to find extraneous reasons for the surprising tiff.
More of the same
In this context, Raghuram Rajan, based on a scrutiny of his writings, was expected to have done much the same – allow high interest rates to choke off demand, continue to complain about the fiscal deficit and attribute the sudden crash in the INR to global capital flows. Any attack on the virtues of fiscal austerity (code word for more unemployment so that labour is taught a lesson) is, in Rajan’s world, cause for paranoia. This worldview is close to the current establishment’s ways of thinking – namely, inflation is due to the poor consuming more and excessive spending by the government. So Rajan’s appointment probably had little to do with any government view that Subba Rao had messed up or any expectation that Rajan would do something different.
In all probability, his “starry” image may have been used to generate an impression that some innovative steps were being taken, backed by a comfort factor from his year as Chief Economic Advisor that fitted with the current government’s ideological perspectives. A government so wedded to conventional economic thinking would never have considered a Bala Menon or a C.P. Chandrasekhar. And the option of an internal candidate from the RBI would be even more remote, considering the glass ceilings that operate. Ghar ki murgi daal barabar [A pithy Hindi saying which translates as: If made at home, even chicken seems like (plain old) daal. Meaning: What is homegrown is undervalued, far more appreciated are things from outside.] Why, then, was there so much excitement for more of the same? It seems to have been a pointless quarrel after all!
The track record: Opacity in top public appointments
What criteria does the Government of India follow in making high level appointments? It is useful to separate top appointments into those that bestow a privilege rather than require decision-making, more in the nature of rewards, from those that carry authority and have the potential for significant impacts on public good. For example, appointments such as India’s executive directors to the World Bank, International Monetary Fund (IMF) or Asian Development Bank (ADB), Governors to less sensitive States, ambassadors in London, have traditionally been rewards and may have relatively little impact on public good (other than some cost to the exchequer). In contrast are appointments that can directly influence public good, requiring public confidence and trust. At the national level, apart from the RBI, these include posts such as the Chief Election Commissioner, the Chief Vigilance Commissioner, the Comptroller and Auditor General, or leadership positions in the Competition Commission, Chief Information Commissioners, SEBI, etc. Our concern is with the latter category.
How have appointments to top posts that directly impact public good been made? No one really knows. All one can do is speculate. Are they based on rewards for past services rendered or expectations of future cooperation? There are also occasions when a “star” has been brought in, usually from outside to create an impression of dynamism and change, especially when things are going wrong domestically. For an academic, used to university portals with the ultimate pressure being limited to having to publish yet another paper, the heady experience of closeness to political power and an arena for policy level decision-making can be exhilarating. A dispassionate analysis of major appointments under the Government of India reveals, not just a clear preference not to look within the ranks, but also the complete secrecy of the selection process itself. This contributes to behind-the-scenes lobbying and encourages extraneous considerations to percolate into later decision-making. The pattern is equally evident in State-level appointments, for example, to the State Information Commissioner, Human Rights Commissions, or the Electricity Regulator.
Thus, even when public good is at stake, top decision-making appointments have been marked by opaque processes and seem to be made more as rewards and less based on domain expertise or sensitivity to poverty and disadvantage. If this trend is to be bucked, we would need governance reforms – reforms that prevent or at least mitigate against explosions such as those that arose in the Kalmadi and Thomas cases.
What are the prospects for change?
Setting aside appointments that are doled out without much impact on public good, for the time being, let us focus on those that need scrutiny and watch. What would it take for India to transit from a situation of making senior appointments on the basis of loyalty or personal relationships to one based on a verifiable assessment of probity and competence? It is, of course, a prerogative of the political leadership to fill top public positions. After all, one of the rewards of power is to appoint people aligned with your thinking where the appointer ultimately takes the flak in case of poor choices. What then are the prospects for establishing clearer guidelines in making senior appointments to ensure necessary skills and probity, establishing processes that can stand external scrutiny so that public good is promoted rather than compromised? In short, is India ready to change from ad hoc choices to more structured selection and appointment processes with built-in accountability?
As countries transition from dispensing public office on the basis of relationships to one where institutions are respected, a key ingredient is openness and transparency in the process through which choices are made. For example, in the United States most senior appointments are subject to congressional hearings. Judicial appointments, though political, are rarely made in the dark. It would be difficult to appoint judges in the U.S. without knowing their stand on Roe versus Wade or gun control. Further still, once appointed, most institutional heads are called upon to explain policies. For example, the Federal Reserve is called upon routinely to testify on matters of monetary policy.
Indeed Subba Rao makes the case himself for such opportunities in India: “It has often struck me that for a public policy institution with such a powerful mandate, these mechanisms for accountability are both inadequate and unstructured. Perhaps, we should institute an arrangement whereby the Governor goes before the Parliament Standing Committee on Finance twice a year to present a report on the Reserve Bank’s policies and outcomes and answers questions from the members of the Committee. In my view, this will not only secure the accountability structure but also protect the Reserve Bank from any potential assaults on its autonomy.”
The key question is why did Subba Rao not propose such an arrangement while in office? Manmohan Singh, himself an outsider-turned-insider, who saw both sides (he was the CEA and RBI head before joining politics) had the potential and opportunity to initiate process reform but did not do so. Perhaps his own babu history was a constraint. In other countries changes come about through serious legislative work, often supported by think tanks. Nevertheless significant governance reforms do need a catalyst.
The spark for structured change may possibly lie in the unstructured entity called civil society. More and more sections of civil society are becoming articulate against self-serving adhocism that perpetuates elite privilege with little accountability. While enunciation is still sporadic, growing voices for the Lok Pal and the aggravation expressed over the appointment process for the CBI director could spill over into a more coherent discussion. With new media amplifying individual voices, engaging and informing younger voters, it is just possible that the political elite realise that positive change can also pay rich electoral dividends. After all some of the big ticket changes have come about unexpectedly like Rajiv Gandhi’s decentralisation and Sonia’s institutionalising the right to information. Perhaps structured and accountable processes for selection of persons for top public offices may come about likewise – when public good is seen to coincide with political gains.