Even for those of us not versed in the intricacies of monetary policy, the institutional and psychological dimensions of two major appointments are quite fascinating. The two largest democracies in the world are shortly going to make their most important economic appointments. The United States will appoint a new chairman of the Federal Reserve, and India a new governor of the Reserve Bank.

Both appointments are coming at a crucial time. While there has been modest good news, the debate over recovery in the US is far from over. India is now in near panic mode on its economy. The panic is not being articulated partly because we have one new political distraction a day, partly because the deep and lingering effects of our current mismanagement have yet to fully kick in. But not since 1991 have we been on the verge of such a deep crisis, which now threatens to become a vicious circle, where a high current account deficit, inflation, paucity of investment, declining savings rate and sheer uncertainty threaten to feed off each other. We have unprecedented capital flight. Panic also leads to self-defeating short termism. Think of the enormity of our slide. We are openly talking of import controls. Capital flows can, under some circumstances, be a good thing. But one knowledgeable investor observed, after Finance Minister P. Chidambaram's last visit to Washington, that India now seemed to be saying, we need hot money mutual funds to rescue us. Unintentionally, we send the signal of craven dependence. This is a bad place to be in. In such a context, the role of the RBI governor is going to be stressful in an unprecedented way. But both the chairman of the Federal Reserve and the RBI governor must feel at times that the fate of civilisation rests on their shoulders. Of course, the economic and political contexts of their appointments are vastly different. But the debates over different candidates in the two contexts are quite revealing.

In the US, the pre-appointment debate has historically been dominated by the "principles" or ideology of the main candidates. The very institution of a Senate confirmation requires some public discussion on the past record of the candidate. In the US, for the most part, debates over both monetary policy and banking regulation more neatly align with broader ideological divisions and partisan politics. In fact, it is almost as if the left and right division in American politics is now being refracted through the central bank. Try mapping Indian debates over monetary policy on to party and ideological divisions and you will end up with a classic Indian enigma. The US has much greater depth in areas like finance. India has no shortage of economists but finance, particularly in the context of an open economy, has been something of a backwater. The number of people who can even credibly intervene in a debate can be counted on one's fingers. In the US, the debate over one of the strong candidates, Larry Summers, centres on his past record, his stated views and his personality. In India, the debate is largely over whether it will be a bureaucrat or an eminent economist. It is a sign of progress that at least there is a worthy macro economist in the mix.

Bhairon Singh Shekhawat used to have an Indian theory of governance: kursi sab sikha deti hai. He meant it as an expansive democratic gesture: if you had basic intelligence, common sense and ability to learn, you need not worry too much, the chair will teach you everything. Of course, in India, this noble democratic sentiment was quickly converted into the proposition that bureaucrats can occupy every chair. But lest you think this is an argument against having a bureaucrat, Shekhawat also had the reverse adage: aur jo jyada jante hain, unko kursi bhula bhi deti hain (those who know much, forget a lot for a chair). In short, ex ante professional paths do not tell you much about future behaviour. In some ways, the last proposition is a resonant description of what happened to knowledge systems within this government. Governments will take decisions out of their own compulsions. But the system often had enough honest brokers who would tell it as they saw it. There are very few of these people left in the system, and this makes the job of the RBI even harder.

When you look at the decimation of institutions around you, it is fair to say that a succession of RBI governors have artfully managed to preserve the integrity of the institution. They may have made mistakes but they have not been craven. But the new governor is going to face challenges that have not been faced before. One of the reasons it is so hard to debate qualifications in terms of principles and beliefs is that this job now requires unprecedented jugglery. Economic philosophies are easy to debate. But we are in a world where a priori deductive logic is not going to work. You will need a governor who is sure-footed and nimble in the face of a fast-moving empirical reality. Theory is not the same thing as judgement. Even if the goal, controlling inflation, is clear, the timing of the instrument is not. More than fidelity to principles, he or she will need the ability to diagnose the undercurrents in the economy in real time, and not be bewitched by pressures masquerading as social science arguments. We thought the RBI would have to adapt from being an institution designed for a close, planned economy to being an institution for an open, unplanned macro economy. But now that the broader framework of reform has been decimated by ad hocism, the RBI will have a harder time figuring out what kind of world to aim for.

There are new institutional challenges. The RBI will have to take a call on bank licences to corporates. In the current climate, this process will have to be impeccable, or else it will give leverage to other institutions to acquire power over itself. India is the only country in the world where the prospect of a future CAG assessing the RBI's monetary policy is no longer in the realm of jokes. The Financial Sector Legislative Reforms Commission has proposed far-reaching institutional changes in the functioning of the RBI. These proposals are a mixed bag, but a governor will have to use his authority to ensure we don't weaken the RBI by stealth. Authority always has to be created, it does not inhere. A lot rides on figuring out who will be able to handle the single most important appointment this government will make.

The writer is president, Centre for Policy Research, Delhi, and a contributing editor for

'The Indian Express'

express@expressindia.com

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