In September, the Bank of England advertised in all leading newspapers and periodicals in the UK and overseas, looking for the right candidate to succeed governor Mervyn King, eight months before the position falls vacant in June. The advertisement clearly spelt out what kind of skill, expertise and experience an ideal candidate should have. The closing date for all applications was 8 October 2012.
In the last week of November, Mark Carney, 47, the head of the Canadian Central Bank, was appointed as the new governor of the Bank of England. Carney—who will have a five-year tenure at the Bank of England—will continue to serve in his current position until May next year.
Recently, there has been another advertisement looking for a deputy governor for prudential regulations. The last date for application is 14 January and interviews will be held between 21 January and 8 February for the position which starts functioning from April.
How do such high-profile appointments happen in the US? The members of the board of governors of the Federal Reserve System are nominated by the US President and confirmed by the Senate. The chairman and vice-chairman of the board are appointed by the President and confirmed by the Senate. Some 90 years ago, the Federal Reserve Bank created a central bank, consisting of 12 regional federal reserve banks and a seven-member Federal Reserve Board. In 1935, the year the Reserve Bank of India (RBI) was set up, the Federal Reserve Board was rechristened as Board of the Governors of the Federal Reserve System.
In Europe, the governments of 12 member states must agree on the appointment of the executive board of European Central Bank (ECB). Once the Council of Economics and finance ministers of the 12 nations reach a consensus on the candidates, the European Parliament and ECB are consulted and finally the appointments are confirmed by the heads of states.
Let’s shift focus to India. When former RBI governor Y.V. Reddy’s five-year term was coming to an end in September 2008, there was intense speculation on his successor and a possible second term. His deputy Rakesh Mohan, who was in the US on an assignment, was called back for an interview but then finance secretary of India D. Subbarao got the job. An upset Mohan, who was in charge of critical monetary policy, stayed put during the global financial crisis in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. but left in June 2009 before his term ended. His successor Subir Gokarn, chief economist of global rating agency Standard and Poor’s, was identified by a search committee headed by Subbarao.
Gokarn’s three-year term ended on 23 November but he continued till 31 December till his successor was identified. Urjit R. Patel, a non-resident senior fellow of the Brookings Institution and an advisor to the Boston Consulting Group, will succeed Gokarn with a two-year term but it may take a while as even after Prime Minister Manmohan Singh signs off the appointment, it takes months to complete formalities for an outsider who is coming to Mint Road.
There is nothing new in a deputy governor stepping down and his chair remaining empty, even for months. In fact, Gokarn stepped in five and a half months after Mohan had left. Similarly, K.C. Chakrabarty, another deputy governor, succeeded his predecessor V. Leeladhar after six-and-a-half months. But the appointment process is not always transparent; often it shows utter disregard for professionalism.
A search committee was formed late October, more than a month before Gokarn’s last day in office, and met a number of times but could not finalize its recommendations and hence Gokarn was asked to hold the fort till 31 December. At that point, the signal was pretty clear that he would not get another term as, typically, a three-month extension is given if the government plans to renew the incumbent’s assignment by one more term. Why was Gokarn asked to stay in office for five weeks when the government had already made up its mind to replace him?
RBI governor Subbarao had written to the government months before Gokarn’s term ended, seeking another term for him. The government declined to accept his recommendation and yet he was made the chairman of the search committee that looked for Gokarn’s successor. And even after interviewing two other candidates—Patel and World Bank economist Kalpana Kochhar—Subbarao stuck to his original recommendation, that is putting Gokarn’s name on the top of the list of three candidates that he found suitable for the job. The government once again rejected his choice. Of course, it is perfectly within the government’s right to choose one of the three names recommended by the search panel but what’s the point in making the RBI governor chairman of the panel if it decides not to respect his preference? Perhaps it is the government’s way of telling the world who is the boss.
There was nothing wrong in not extending an incumbent’s term even if that may instil a sense of insecurity and RBI may find it difficult attracting talented young professional from the market for a deputy governor or governor’s post, but the government should be sensitive on how it is done. Gokarn, 53, was presumably not given a second term for his failure in combating inflation. If indeed this is the case, it has been a collective failure of the Indian central bank as the deputy governors merely give inputs for the monetary policy, which is essentially the governor’s policy.
The only way to maintain RBI’s autonomy and the government’s credibility is making the appointment process transparent. Both the central bank and the finance ministry should stay away from the process and allow the experts to do the job for the greater good of Indian economy.