HAPPY AUGURY for the RBI: Mythili Bhusnurmath

Economic Times, June 2, 2014

Happy augury for the RBI

Mythili Bhusnurmath 
Monday June 02, 2014, 05:51 AM
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.


Popular posts from this blog



The King of Ragas: Sankarabharanam