The only major policy institution that remains unreformed post-reforms has clearly and strongly argued that it does not need reform. Speaking for the institution he leads, Duvuuri Subbarao said in a speech on Thursday that all things considered, things are not just okay, but positively fine, and advocates of RBI reform simply don’t get the point. This is worrying at three levels. First, this signals that the benefit of doubt given by many to Subbarao was an injudicious investment. As an outsider, as a smart bureaucrat, he carried hopes that he would start, if not with a bang then via discernible incremental changes, the process of reviewing the optimality of RBI’s vast empire. A year into his term, this seems to have been a hopelessly naïve assumption, of which these columns now stand guilty as well. Governor Subbarao is the kind of governor that RBI’s vast bureaucracy rather likes. The second point to note is a lesson from history, indeed recent history: those who say we are the exception, we do things so well that we don’t have to worry are often the victims of that hubris. RBI says the financial crisis and its aftermath shows that RBI exceptionalism in terms of policy architecture is a thing of marvel, no changes please. Remember what American finance and financial regulators used to say before the crisis? That the American model is a marvel, that American exceptionalism in terms of finance is brilliant, that good times will carry on. RBI has spent a great deal of intellectual energy over the last year poking RBI-style fun at American finance. The more important lesson is that in finance, saying whatever we are doing is good for all foreseeable times to come is a very risky bet.
The third point relates to RBI’s implicit message that there’s no crisis in Indian banking. Actually, there is. It’s just that it’s not a spectacular event that the media can feast on. It’s a low-burn crisis that’s sapping India’s economic potential—this is a massively underbanked country, this country has a monetary policy whose signalling system doesn’t work well (low short-term interest rates and high lending rates, for example), this country has an inefficient sarkari banking system and Kafkaesque micromanagement of banks. Just because these don’t make headlines doesn’t mean they don’t need change. One can debate the direction of change. Although even there RBI is on weak ground—how can it support the system of over-the-counter financial instruments and critique American finance when one of the biggest lessons of the crisis is that exchange-traded products should become the norm? But RBI doesn’t think there’s anything to debate. RBI says RBI is fine. Are we supposed to take that as a serious policy position? The political class must wake up.