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RBI Autonomy inHistorical Perspective

T
his has reference to the article ‘Structuring Regulation: Constitutional and Legal Frame in India’ (January 14, 2006) by T C A Anant and Jaivir Singh. They are quite right to revisit the issue of autonomy of central banks and call for the independence of the Reserve Bank of India (RBI). It might be interesting if the issue of the independence of the RBI is viewed in a historical perspective.

Autonomy of the central bank has been a recurring theme in the literature on monetary policy and central banks. However, the exact relationship between a central bank and the government in any country is also determined by the historical circumstances as well as the practices that have developed over time. Long before the Hilton-Young Commission’s recommendation in 1926 about the creation of the central bank, the Chamberlain Commission in 1914 included in its report a comprehensive memorandum by John Maynard Keynes, one of the members, which proposed that the three presidency banks should be amalgamated into one central bank to be called the Imperial Bank of India, which would undertake the functions now generally associated with central banks. The Imperial Bank Act was passed in 1920 on the general lines of the Keynes’ memorandum. The seed of a central banking institution for India was planted at the same time. However, the underlying intention that the Imperial Bank should gradually take over the currency and other central banking functions could not be fulfilled, mainly because of its dominating commercial functions. It is good to note that the Hilton-Young Commission took the line that an entirely separate institution should be created, to be called RBI, and that the Imperial Bank should be more completely commercialised and should merely operate as the agent of the RBI for the routine management of the government accounts.

That it took nine years for this new line of approach to reach its goal was due to more than one reason. Attached to the report of the Hilton-Young Commission was a minute of dissent from an influential Indian member whose views in economic and monetary affairs commanded and recommended the gradual evolution of the Imperial Bank on the central banking line. Government circles also had reservations about the question of the controlling authority of the new institution. The Hilton-Young Commission advocated private shareholding and that the shareholders of the Imperial Bank get first opportunity to subscribe to the capital stock of the new bank. The government did not accept the suggestion and implicitly advocated a state bank. However, socio-political issues extended the debate.

The report of the Central Banking Enquiry Committee, 1931 laid strong emphasis on the early establishment of a reserve bank, and in 1933, in the round table discussions, the scheme for the creation of a reserve bank was again brought forward, but from a new standpoint. The question at issue was that of transferring financial responsibility at the centre to an executive responsible to the legislature, and it was thought by government sponsors of the scheme that if a body of shareholders should be created, they would produce a directorate which would operate as an internal safeguard against any rash financial or currency experiments.

(Continued on p 660)

Correction

In the article ‘In Chhattisgarh, a River Becomes Private Property’ in this issue, in the first column, at the end of the first para, on p 612, the sentence “A decision was taken to the effect that of the total loss of Rs 9 crore…” should have read as “A decision was taken to the effect that of the total cost of Rs 9 crore...”

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Economic and Political Weekly February 18, 2006

Letters

(Continued from p 534)

It is interesting to note that the share capital was to be entirely owned by private shareholders. Official control was limited to the appointment by the central government of the governor and two deputy governors after consideration of the recommendations made by the central board in that behalf. There was a provision in the public interest that the government be empowered to check the central board in case of failure to meet its statutory obligations.

The spirit behind the creation of the RBI was the advocacy of functional autonomy of the central bank.

TAPAS KUMAR CHAKRABARTY

Mumbai

Web Library

I
am writing with reference to the article on a web library (January 28, 2006). One thing is certain that even in the age of Google, information is scattered and it is very difficult for researchers to track all work done on a particular topic through the various interfaces available in the country. This situation continues not only in India but in developed countries as well. Information professionals are working on digital libraries and open archive concepts worldwide. Hopefully this initiative will sort out many such problems.

I agree that there is an urgent need for making all publicly funded research reports available for free online access. It is equally important for other private funded research reports to be made available, at least for reference work. This is very much essential for healthy research to continue in the country. V Srinivasan’s initiative for hosting a web library may be a good platform for information seekers. However, there are already many web/internet libraries available on the net in the public domain. They have failed to integrate all the digital information available internationally. Recently, the government of India came out with a plan to create a national digital library. Let us hope that this proposal will fructify.

AMAN KUMAR JHA

Gurgaon

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    Economic and Political Weekly February 18, 2006

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