YV Reddy

In September, an Indian newspaper ran a report, titled “If you go by their ad, YV Reddy could become the next governor of Bank of England”. How do you feel after reading the report?

Dr Reddy grinned.

"Well, the report was actually to describe the process of recruiting the central bank chief in the United Kingdom," said Reddy, the former governor of the Reserve Bank of India.

"I think this is important. They make an advance succession plan for important positions.”

“You probably know that finally the UK government appointed Mark Carney as next governor. He was the governor of the central bank of Canada. And Canada is one of the few developed countries not heavily jerked by the global financial crisis. It is Mr Carney who skilfully managed the monetary stability,” Reddy said.

Do you think it is a good practice?

"Yes, I think, it is a good practice."

"In South Asia as well as in developing countries, we need to adopt such practice to some extent so that we can learn from one another. In the era of globalisation, central banks need to have globalised expertise."

Reddy was in Dhaka last week to deliver the Nurul Matin memorial lecture at the Bangladesh Institute of Bank Management.

He last came to Dhaka in 2007 to join ACU (Asian Clearing Union) annual board meeting and the Saarc Finance meeting when he was serving as the governor of the RBI. At the time, he didn't agree to speak to the press separately.

Nevertheless, he told us, as I along with a colleague of mine approached him for an interview, that next time he would talk with us exclusively.

After serving RBI as the governor for five years (2003-2008), he is now dedicated himself to the academic world. His two books -- "India and the Global Financial Crisis: Managing Money and Finance" (2009) and "Global Crisis, Recession and Uneven Recovery" (2011) -- are appreciated across the world.

The first is an account of his five years at the helm of RBI and outbreak of the financial crisis in the USA. The second book, a sequel to the first, is a detailed analysis and lessons from the crisis as well as recovery process. Both the books contained a careful and coherent selection of Reddy's speeches and papers he delivered several times along with necessary updates.

SOUTH ASIA
During the interview, Reddy talked about the regional economy and the role and activities of the central bank in South Asia.

The biggest problem in South Asia is the fiscal management, not monetary supervision, according to him.

"If you don't have headroom, you will be in the problem of handling shocks. This is the common problem in the countries of the region," Reddy said.

He also said worker remittance was a common strength in South Asia and the external sector is helping the regional economy.

South Asia has taken advantage of globalisation in terms of the movement of people but not in trade in supply chain. "The future of South Asia will depend on three things: fiscal consolidation, trade integration and moderation of social tension."

At this point, Reddy lauded social and human development indicators of Bangladesh.

"A rich nation may be inefficient in social indicators, but Bangladesh has proved that social indicators can be improved despite limited resources and relatively week macro-and micro economic conditions," he said.

“Social development along with social banking in Bangladesh is praiseworthy,” he added.

Reddy also stressed regional integration in South Asia. "I think there is a consensus and support on different levels as research and analysis reveals huge benefits of regional integration by expanding trade and investment.”

"I have a feeling that people of the countries are also ready for such integration. But somewhere political will is not coming up across the border."

Reddy favoured equity in resource distribution in the development process. "It is important to evaluate incentives properly. When money goes to rich people, it is dubbed incentives. But when money goes to the poor, it is termed as subsidy," he said.

“Just think about tax relief to entrepreneurs for setting plant in an economic zone. This is actually a tax subsidy. And when government provides some financial support for the farmers, it is called subsidy, not incentive. But both have fiscal implication.”

“So the attitude matters and we need to evaluate the real benefits of such incentives or subsidies. We need to examine the level of waste.”

Asked about how Reddy managed to assert the authority of RBI and still have a good relationship with Indian Finance Minister P Chidambaram, he said he was asked similar questions even when in office.

"I used to say then that I was in fact an independent central banker and RBI is independent. And I have taken permission from the finance minister to tell you this.”

On a serious note, Reddy said, the independence of a central bank depends on the will of the government. Most central banks of the world are created by law and are not constitutional bodies, he said. "And it is the government and the finance ministry that are responsible to parliament."

"I can assert, I can discuss, I can convince. I am independent in operational area. In the final analysis, the central bank is independent only to the extent that the law and practices of the government permit it to be," he said.

Reddy was of the view that a central bank is created by the government to convince the people that some important things would be done in an apolitical manner. So, governments restrict own authority in favour of authority for the central banks.

Regarding differences and disagreement with the government, Reddy said: "If the Reserve Bank always agrees with the government, then it would not be a central bank, it becomes a division of the finance ministry. But independence doesn't mean lack of coordination and always taking the opposite stand."

Reddy referred to a personal experience about the issue that occurred when he and Chidambaram were at a bank-fund meeting in Singapore.

"We were rarely together on policy and I never spoke when the minister was present. After the meeting, somebody said that he was confused as the finance minister was saying one thing and the governor another."

Chidambaram replied, “What is your problem? I have been assuring you on fiscal consolidation and growth and delivered. The governor has assured you macroeconomic stability and control of inflation. He is also delivering. So what is your complaint?”

"In fact, there should be always discussion and consultation. Finally, there should be trust. Once you have trust, once you have confidence, it works out smoothly," Reddy said.

Asjadul Kibria is the business page editor of Prothom Alo and can be reached at asjadulk@gmail.com.

News: The Daily Star/Bangladesh/17th-Dec-12