But is the RBI really autonomous? And has monetary policy acquired a role which it did not have before the reform? In theory central bank autonomy is seen as the end result of the process of rendering central bank operations relatively independent of the fiscal decisions of the government, so that the RBI could adopt an effective monetary policy. Till the early 1990s a major way in which the deficit in the budget of the central government was financed was through the issue of ad hoc Treasury Bills, which provided the government access to funds at a relatively low interest rate. Once the volume of open market borrowing by the government was decided upon, the remaining gap in the budget was automatically monetised through the issue of ad hocs, as they were called, which the RBI was expected to compulsorily finance.
 
This obviously reduced the central bank's control over money supply. Fiscal decisions that increased the central bank's credit to the government, also increased the high powered money base in the system, leading to an increase in money supply. Since the prevailing monetarism believed that money supply trends were responsible for inflationary conditions, the central bank's pursuit of what was seen as its primary objective, viz. price stability, was seen as having been eroded. Restoring a role for monetary policy was predicated on curbing the ability of the government to finance its deficits through issue of ad hoc Treasury Bills. In pursuit of that goal, the government entered into an agreement with the central bank to put an annual ceiling on the issue of Treasury Bills, to reduce that ceiling over time, and finally to do away with the practice of monetising the deficit through the issue of ad hocs. That agreement has been successfully implemented, leading to a sharp fall in the monetised deficit and ostensibly increasing the autonomy of the RBI and enhancing the tole of monetary policy.
 
The whittling down of the monetised deficit does seem to have increased the confidence of India's central bank, judging by the tone of the Reserve Bank of India's Annual Report for 1999-2000. If the Report is to be believed, monetary policy during 1999-2000 was driven by the need to ensure that "all legitimate requirements for credit were met while guarding against the any emergence of inflationary pressures." With industrial growth having picked up from less than 4 per cent in 1998-99 to more than 8 per cent in 1999-2000 (Chart 1), private demand for credit must have been on the rise. Yet broad money growth stood at just "13.9 per cent, which was substantially below the long-run average of a little over 17.0 per cent."
Chart 1 >>
 
This lower growth had occurred despite the fact that with the average rate of inflation at a decadal low (Chart 2), there was no immediate threat of an inflationary upsurge. What is more, demand supply imbalances, which could be worsened by an easy liquidity situation, do not seem to have been responsible even for the low rate of price increase recorded. As Chart 3 shows, primary commodities, whose prices are driven by such imbalances contributed little to the oserved inflation rate. Much of the increase was due to administered price increases (Chart 4), which pushed up prices in the Fuel and Manufactured Products groups.
Chart 2 >> Chart 3 >> Chart 4 >>
 
In rhetoric, the context of low inflation is seen to have provided the RBI with the opportunity of focusing its attention on growth. Some stimulus for growth seemed necessitated by the fact that one of the major stimuli for growth prior to reform, namely the expansionary influence of deficit-financed government spending, had been substantially dampened as a result of reform. This occurred in two ways. First, through a curtailment of the fiscal deficit. As Chart 6 shows, the average fiscal deficit-to-GDP ratio, which stood at 7.2 per cent during the 1980s and was brought down marginally to 6.7 per cent during the first half of the 1990s has come down further to 5.6 per cent during the second half of the 1990s. Second, associated with a lower fiscal deficit has been a lower tax-GDP ratio, resulting from the fact that while indirect tax collections, especially customs duty collections, have fallen as a result of reform-driven tariff reductions, direct tax collections have not risen enough to neutralise this fall. As a result, a given level of the fiscal deficit-to-GDP ratio does not imply a similar expansionary stimulus prior to and after reform, because post-reform figures are associated with lower revenues and expenditures relative to GDP. The net impact has been that during the 1990s, industrial growth has been indifferent in most years.
Chart 5 >> Chart 6 >>