GOI and RBI

FM's relationship issues with RBI

ONLINE COMMENTS POSTED ON AUGUST 16

FM’s observation in Rajya Sabha on August 14 that every party and Parliament should take a view on the issue of a central bank’s mandate “so that a message will go to the country and to the central bank that price stability is a primary mandate of the central bank but it is part of a larger mandate of promoting growth and employment” makes it ‘official’ that FM has problems with RBI which may not get resolved just with the change of guard at Mint Road, but may need outside intervention for solution. King
Same day, in a different context, RBI Deputy Governor Anand Sinha asserted that “when financial risks rise, the focus of monetary policy should be to contain them even if that means sacrificing growth in the short term”.
While there is nothing unusual in ministers and executives or economists and technocrats having difference of views on policy issues, the present status of relationship issues between FM and RBI goes beyond that and should be taken note of by PM for restoring harmony simultaneously with the taking over of new RBI Governor on September 5.

M G Warrier, Mumbai

Economic Times, Blog, August 15

Economics 101 for the FM

Mythili Bhusnurmath 
Thursday August 15, 2013, 07:46 PM
The Finance Minister, P Chidambaram’s statement in Parliament, ‘My government believes that while price stability is important, it has to be in the larger context of growth and employment generation; let Parliament take a stand on it so that the message will go to the central bank,’ shows how little the FM understands a fundamental lesson of economics. Price stability and growth are not mutually exclusive. One cannot have growth without price stability.
Indeed almost all our problems today can be traced to the UPA government’s na├»ve belief that the country can have high economic growth regardless of what happens to inflation. But, as our faltering growth story shows, that is simply not possible. Indeed as the PM himself has stated on more than one occasion the best antidote to poverty is low and stable inflation.
Unfortunately the FM’s statement, almost a challenge to the Reserve Bank of India (RBI), while replying to a debate in the Rajya Sabha on the country’s precarious economic situation, shows the FM has not internalized the lessons of the past four years. What are these lessons? That a combination of his government’s failure to heed repeated warnings of over-heating and the RBI’s initial reluctance to stand firm against government pressure to keep interest rates artificially low have landed us well and truly in a mess.
But instead of seeing how best the government and the RBI, the two institutions charged with administering the two main tools of macroeconomic policy – fiscal and monetary policy respectively – can work together, the government seems hell bent on running down the latter. That is a sure recipe for disaster. Fiscal and monetary policy must act in tandem. Growth, invariably, flounders in the face of high inflation. 
Comments:
Jayeshkumar
August 16,2013 at 12:06 PM IST
One rule is enough. .. Karma. 
Atma Gandhi
August 16,2013 at 11:30 AM IST
Inflation causes increase in costs for business also which may not be passed on to consumers instatntly & result in losses and also require higher working capital which may not be granted by banks promptly & resulting into delay / default in payments. Thec major cause of Inflation in India is Government itself as it waste lot of money and raise procyrement prices every year causing higher subsidies (deficits) and demands by other sectors. Growth must come from Investment and productivity Growth and not Inflation.


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