HAPPY AUGURY for the RBI: Mythili Bhusnurmath
Economic Times, June 2, 2014
Happy augury for the RBI
Inevitably, Prime
Minister Narendra Modi’s decision to keep everyone guessing about the
portfolios of his Cabinet ministers on swearing-in day gave rise to a great
deal of comment. "Why, for example, are some ministers likely to be given
dual responsibility for unrelated and large ministries? Defence and finance,
for example, have nothing in common," asked the editorial of a pink paper.
Clearly, the edit
writer could do with some lessons in statecraft. Defence and finance are but
two sides of the same coin. No country can be secure militarily unless it is
secure economically. If the US today is the world’s biggest military power, it
is because it is an economic superpower. To argue that defence and finance have
nothing in common is facile.
Two Good
Few ministers are experts on their subjects.
Thabo Mbeki, who followed Nelson Mandela as South African President, said,
"I don’t imagine heads of government would ever be able to say I’m not an
economist, therefore, I can’t take decisions on matters of the economy; I’m not
a soldier, I can’t take decisions on matters of defence; I’m not an
educationist, so I can’t take decisions about education."
So, the lack of commonality or of technical competence straddling two
diverse subjects is not the main argument against loading Arun Jaitley with the
defence and finance portfolios. Rather, both portfolios require an enormous
amount of time and attention; and no single minister can possibly do justice to
both.
Assuming Modi will see the wisdom of this
argument and shift the defence portfolio to someone else, what is it the new FM
must keep as his lodestar in the growing din over economic issues: the Budget,
the fiscal deficit, inflation, goods and service tax (GST), Direct Taxes Code
(DTC), the current account deficit, black money and what have you?
At Loggerheads
The guiding principle must be to work towards a
healthy relationship with the governor, Reserve Bank of India (RBI). The
finance minister must work with RBI to tackle the two big bugbears before the
government: slow growth and high inflation.
There are only two levers of policy available to
any government: fiscal and monetary policy. Sustainable growth is possible only
if both work in tandem and not at cross purposes. Not if the relationship
between the RBI and the finance ministry is strained, as was the case during
much of the UPA regime.
Most people remember the stormy relationship
between ex-finance minister P Chidambaram and former RBI governor D Subbarao.
But few remember that the relationship between Chidambaram and Y V Reddy,
Subbarao’s predecessor, was equally stormy. The FM wanted faster opening up of
the economy, especially the financial sector, while Reddy, a quintessential
central banker, favoured "calibrated opening up". Luckily, he was
able to stick to his guns and we were spared the excesses of the 2008 financial
crisis like reckless securitisation.
Democratic compulsions often conflict with
economic virtue. Yes, there is bound to be friction in a relationship where the
protagonists have different timeframes. Jaitley’s timeframe is till 2019, after
which his job is up for grabs. The RBI has the luxury of a much longer time
frame. The governor doesn’t have to contest elections, so he can afford to dole
out tough love even as the FM treads warily, with an eye on different
constituencies. But that doesn’t mean the governor and the FM have to be
antagonistic. Their means might differ. But since the goal is the same — growth
with price stability —they have to work towards a policy that is best in the
long term.
Mutual Respect
As Subbarao put it, "An apolitical central
bank, operating autonomously within a statutorily prescribed mandate and with a
longer time perspective, is an effective counterpoise to a democratically
elected government which typically operates with a political mandate within the
time horizon of an electoral cycle….
But this is a delicate arrangement and will work
only if the government respects the autonomy of the central bank, and the
central bank itself stays within its mandate, delivers on that mandate and
renders accountability for the outcomes of its policies and actions."
Initial statements from Jaitley suggest he
recognises the need to work together with the RBI. Historically, non-Congress
governments have had a better relationship with the RBI than Congress-led
governments.
The RBI enjoyed greater freedom when Yashwant
Sinha was FM in the Chandrashekhar government in the early 1990s. Bimal Jalan
was given a free hand during the Asian crisis, first by Yashwant Sinha and then
Jaswant Singh in the NDA regime. Ironically, Chidambaram showed much greater
respect for the RBI during his two stints as FM in non-Congress governments led
by Deve Gowda and I K Gujral.
Hopefully, now that we have a non-Congress
government in the saddle, the relationship between the finance ministry and RBI
will once again be one of mutual respect rather than mutual animosity.
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