Perhaps the finance minister believed that RBI would be better counsel. But Governor D. Subbarao seemed reluctant to give his best advice. Mukherjee and Subbarao have a frosty relationship, professionally and personally. Says a senior official, "In the last few months, there has been a complete breakdown in communication between RBI and finance ministry." Mukherjee and Subbarao have consistently disagreed on the correct level of interest rates for over a year. On June 16, just a week before he left office, Mukherjee signalled his desire to see a lower interest rate. "Keeping in view of all current factors, I am confident that the RBI will adjust monetary policy as we are adjusting the fiscal policy," he said at the National Banking and Insurance conference organised by industry body Assocham.
Two days later, in his quarterly review of monetary policy, Subbarao, in a direct snub to the finance minister, left interest rates unchanged. He also rubbished Mukherjee's diagnosis and prescriptions for the fiscal deficit. Speaking to the Indian Merchants' Chamber on June 19, Subbarao said the Government needed to "cut spending" to reduce the deficit. He also defended high interest rates and hinted that other factors were responsible for the growth slowdown. "In the high growth years of 2006 to 2008, we had higher rates of interest than those prevailing now but the quantum of investment was so high that the economy was growing at over 9 per cent." It was a thinly veiled attack on the Government's policy paralysis.
Sources close to Subbarao say he is not willing to let the Government off the hook in the battle against inflation by lowering interest rates. RBI believes that the UPA Government is doing little to fight inflation, leaving all the work to RBI. For instance, the central bank was displeased at the Government's populist move, on June 14, to raise minimum support prices for key cereals such as wheat and rice in June when food inflation was already running high.
The professional distance between Mukherjee and Subbarao was exacerbated by personal tension. Mukherjee told Congress core committee meetings on the economy that Subbarao, appointed by his predecessor P. Chidambaram, was not taking instructions. Mukherjee was in fact keen to replace Subbarao with Kaushik Basu when his three-year term ran out in September 2011. An intervention by the Prime Minister and the chairman of his council of economic advisers, C. Rangarajan, Subbarao's mentor in Government, ensured a two-year extension for Subbarao.
Subbarao was offended by the fact that the finance minister, in a break from tradition, rarely granted him a one-on-one meeting; According to sources Mukherjee met him one-on-one just twice in three years. "An entire phalanx of finance ministry officials was always present when Mukherjee met Subbarao," says an official. Subbarao repeatedly tried to persuade Mukherjee to meet him alone but Mukherjee refused. Subbarao was also annoyed by the fact that the ministry was trying to order the rbi around with little respect for its autonomy. The distrust grew over time. The breakdown in communication between the officials of North Block and Mint Street did not help. "There are always differences between the RBI governor and finance minister, but their officials continue to remain in touch in all operational matters," says a senior bureaucrat. "That was not happening any longer."
Article continues on next page...