WHITHER CENTRAL BANKING?

By H. V. R. Iengar, I.C.S. (Retd.)

Summary

Drawing on his decade-old vantage as a former Governor of the Reserve Bank of India, H. V. R. Iyengar uses his inaugural remarks at a Madras banking seminar (1 December 1972) to take stock of what the Indian banking system has become — and to warn against the political colonisation of monetary policy. He grants that nationalisation in 1969 accelerated branch expansion, deposit insurance, refinance facilities, and the diversification of banking into developmental work, but insists that much of this trajectory was already laid down in the pre-nationalisation years. The injection of politics into banking, he writes, is “not an unmixed blessing”: deposit mobilisation has been buoyed by deficit financing, credit has been pushed onto weak and priority sectors without regard to ultimate viability, and the over-emphasis on speed has come at the cost of quality and discipline.

The largest section of the booklet diagnoses the failure of the co-operative movement on which seventy years of rural-credit policy had been staked. Following the All-India Rural Credit Survey, Iyengar argues that co-operatives could never have succeeded so long as the rural community was poverty-stricken, the geographical units artificially small, and the urban–rural financial divide left untouched. He is sceptical of the Banking Commission’s pivot to commercial-bank-backed rural banks and warns that the proposed ceilings on agricultural holdings may eliminate the very surplus on which rural credit depends. More fundamentally, he doubts that commercial banks brought under government influence can be trusted to be less political than government itself.

The second half pivots to the central bank’s own role. Iyengar is unsparing about the automatic, undebated issue of ad hoc treasury bills to cover central-government deficits — a procedure so silent that even the Governor learns of it only through the weekly statement. He argues that the object of setting up a Reserve Bank is frustrated if the expansion of credit is not opened to debate between the bank and the government, and, where they differ, to public debate in Parliament. He cites Australia’s statutory mechanism as a model. Rejecting the high-quarter argument that Indian inflation is just part of a worldwide phenomenon, he insists that price rises which hit “the consumption of essential goods like foodstuffs and clothing” cannot be compared with affluent-country inflation without insulting Indian sensibility. He closes by calling for a new commission of inquiry into how the Reserve Bank functions, including whether it has been overloaded with developmental tasks that should be stripped away.

The booklet’s body (printed pp. 1–12) is followed by five statistical appendices reproducing the Reserve Bank’s 1972 Profit and Loss Account, money supply with the public (1960–61 to February 1973), scheduled commercial bank deposits and advances, cheque clearances, and co-operative credit institutions — material that supports the narrative case for monetary discipline.

Key points

• Iyengar reads the 1969 bank nationalisation as continuous with pre-1969 reforms rather than a clean break, and warns that political pressure is now distorting credit quality and discipline.

• Deposit mobilisation under nationalisation has been propped up by substantial deficit financing — “this mobilisation would have happened whether banks had been nationalised or not.”

• The co-operative movement, on which India staked seventy years of rural-credit policy, has by and large failed because the rural community had no surplus to pool and because ideological insistence on village-sized societies kept units unviable.

• Ceilings on agricultural holdings may, on Iyengar’s reading, eliminate or reduce the very surplus needed for a viable rural economy.

• He doubts that commercial banks, once nationalised and politicised, will prove less political than government itself — the structural change may not be decisive in character.

• The automatic issue of ad hoc treasury bills to cover central-government deficits short-circuits the Reserve Bank’s purpose; credit expansion above a threshold should be debated openly between the bank and the government, and ultimately in Parliament, on the Australian model.

• Inflation in poverty-stricken India is qualitatively different from inflation in affluent societies because it strikes essential foodstuffs and clothing — high-quarter comparisons to global inflation are dismissed as an affront.

• Iyengar calls for a fresh commission of inquiry into how the Reserve Bank is functioning, including whether it has been overloaded with developmental and inspection tasks that should be hived off.

• Five appendices reproduce 1972 Reserve Bank accounts, money supply, scheduled-bank deposits/advances, cheque clearances and co-operative credit data.

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