Sunday, August 25, 2013

The talent pool in Macro and Finance

by Percy Mistry.

Dhiraj Nayyar, Director of the Think India Foundation, has just written an excellent, sympathetic piece about Dr. Subbarao's tenure as Governor of RBI.

It is full of pathos because Dr. Subbarao is a decent, dignified and extraordinarily intelligent, capable man with a powerful sense of politeness and decorum. These days: decency, decorum, dignity and politeness are virtues that, in modern political, bureaucratic and corporate India, seem conspicuous by their absence. So anyone who exhibits them, should score highly in anyone's book.

Dr. Subbarao's appointment as RBI Governor shows up, unfortunately, the bankruptcy of a bureaucratic career system that permits outstanding IAS officers like him -- an accomplished urban economist -- to be parachuted into a situation which requires a lifelong acquired feel for monetary policy and the numbers behind it.

From the many central bankers I have known around the world and in India (many of whom I had the privilege of working with, and others whom I came to know socially), and have observed closely over the years, I conclude that central banking is still more an art (that requires extraordinary prescience, instinct and judgement) than a precise econometric science. All top flight central bankers over the last 50 years have invariably ignored econometric evidence when it did not jibe with their instincts (something that a distinguished former Fed Chairman once told me he found essential to do, with all the econometricians around at the Fed!).

In India, our rare 'good' RBI Governors have had luck on their side and not fouled things up too much because of a lack of domain knowledge. Our 'bad' ones have had some bad luck but mostly a lack of comprehension about what they were doing. Most had good luck but still fouled it up without knowing they were doing that. None have had either domain knowledge or monetary policy expertise and experience on their side when they came into the job. They picked up what little they could as they went along.

Sadly, we have not learnt yet that, in the brave new globalised, open economy world we live in, specialised domain knowledge for the management of an open economy is a MUST for fiscal and monetary policy-makers and managers of the macroeconomy. There is no room anymore for relying on the peculiar British civil service tradition of using gifted (or, more likely, ungifted) amateurs, or all-rounders of the kind the IAS believes it still produces. It does produce exceptions like U. K. Sinha and K. P. Krishnan. But they are precisely that -- exceptions. They do not typify the IAS drone -- moderately clever, yet with dull, rigid, closed minds that are comfortably 'knowledge-proof'. I was once reliably informed that the minds of IAS were like powerful steel traps. Pity that they are rarely open.

It is amazing to me that almost none of the members of our top economic team in MoF, DEA, RBI, have much serious domain knowledge in their areas of control (except perhaps Raghuram Rajan and Montek Ahluwalia) or put any weight on its importance. Most of our economic heavyweights know more about managing a closed economy because that is how/when they were brought up as career officers during their formative years. Their instincts are still command-and-control, even when they haven't a clue about what they are doing, or its implications and consequences.

They have no idea how to deal with the challenges of an open (or in India's case partially open) economy and its weird reactions in times of stress/crisis when markets determine the extreme febrility of volatile outcomes. They still fly by the seat of their pants and talk about the 'fundamentals being sound'. That is disconcerting, because it only reinforces the view of the outside world that they do not know what they are talking about. It results in a collapse of confidence in India's economic managers and damages India even more. What exactly is it about any fundamental of the Indian economy that is sound right now -- the fiscal deficit? the current account deficit? capital flows? growth? inflation? the PMI? the food security bill -- which might be more appropriately called the Economic Insecurity Bill?


  1. For Subbarao is an honorable man....

  2. Mr Mistry is betraying his own personal bias against IAS officers by passing off stereotypes without offering any evidence whatsover to back them up. IAS officers no longer have the freedom or the power to formulate policies like the early days of post-Independent India or the ICS days. They people start off open-minded but the Indian environment turns them in what Mr Mistry accuses them to be (without any evidence whatsover to back up his accusations as I will repeat). His attacks remind me of the vicious attacks that IAS officers faced in the media in the late 90s and early 2000s.

    The Indian environment destroys a lot of people. I see this everyday around me and hence warn off many NRIs from returning to India. This kind of sleazy negativism is one example of many.

    If I remember right, Mr Subbarao spent a lot of time in the RBI and is much less of a generalist than most IAS officers. Besides, so-called experienced Central Banking 'artists' like Greenspan have fouled up massively. In fact, I would commend Mr Subbarao for trying his best to stand his ground while being under pressure from a very meddlesome finance minister and the garbage economic data that he has to work with every day.

    I remember how my criticism of the presence of a powerful management consultant in the Planning Commission evoked a swift response here. The fact that in contrast we have an open attack on an IAS officer hosted here shows the real power of these much-reviled babus - power that is declining and non-existent compared to the power wielded by those with money and connections in the private sector, multilateral agencies and politics.

    PS: The domain knowledge that IAS officers have the knowledge of the hinterland where the vast majority of the people of our country reside and go about their lives in ways that would seem peculiar to economic ideologues (including myself).

    PPS: Lets see someone from our elite class attacking a powerful politician or well-connected corporate grandee/academic here.

  3. "the food security bill -- which might be more appropriately called the Economic Insecurity Bill?" or perhaps the 'Election heebie-jeebies and Political Insecurity Bill'...

    - V. Belsare

  4. Prof. Prem raj Pushpakaran writes -- 2024 marks the birth centenary year of Robert Merton Solow and let us celebrate the occasion!!!


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