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| The Hindu Newspaper Editorial Vocabulary : 9 November 2018 -For Various Competitive Exams: Quantamity |
Independence and accountability:
on RBI
As the RBI’s autonomy is debated, it needs to revisit its exclusive focus on inflation-targeting
Far
from achieving a desirable ‘monetary-fiscal coordination’ in India today, the
Reserve Bank of India (RBI) and the government give the impression that they
are not on
the same page even as far as an understanding of their roles is
concerned. This may be seen in statements by them on websites, Twitter and in
the old-fashioned mode of the public lecture given by the Finance Minister and
a Deputy Governor of the RBI, respectively. The RBI suggests that its
independence is being violated while the government rationalises its intervention in
terms of its concern for the economy. How do we make sense of these positions?
Defining autonomy
Even
at the time when the idea of central bank independence began to germinate some
two decades ago, this was understood to mean a ‘functional’ independence. That
is, the bank would be unconstrained by the government in its
functioning, which includes both the instruments it uses and how it uses them.
However, its autonomy was not to extend to ‘goal’ independence. What the goals
of the central bank should be were to be chosen by the government without
reference to the bank. The main issue here was whether the bank should focus on
inflation
alone or also on the level of employment. Within a decade of this debate, it
had been conceded
that the focus would be exclusively on the former, and monetary policy came to
be identified with ‘inflation targeting’.
Two
points may be mentioned in this context. First, the discourse was solely among interlocutors
from Western democracies, ensuring the issues were those related to their
economies. Second, even as the major central banks of the world shifted to
inflation targeting, in yet another example of American exceptionalism, the
U.S. did not revise the goals of the Federal Reserve. It was to continue focus on
maximising employment while keeping prices stable, a sensible recognition of a
possible trade-off
between these goals. In India where for close to a quarter century political
parties of all hues
appear to suggest ‘what is good for America is the best for India’, this has
been missed. In 2015 the RBI was by law, in line with a “modern monetary
policy”, expected to target inflation. It was to remain the banking regulator
though.
Once
we are aware of how central bank independence was first sought to be understood
and of the agreement between the RBI and the Government of India in 2015, it is
not difficult to separate the grain from the husk in the public spat
between the two playing
out in the media. The issues of contention happen to be the
corrective action to be taken for stressed banks, the prudential norms to be adopted
by financial institutions, the easing of liquidity and the sharing of the
surplus generated by the RBI. Here, barring the last, all others are in the
RBI’s bailiwick
so to speak.
On the other hand, on the sharing of the surplus, it is understood that the
Government of India legally is the owner of the surplus generated by the country’s
public institutions. Even under this architecture, though, all care must be
taken to ensure that the central bank’s reserves are of a level commensurate with the extent of
the financial sector and the potential degree of systemic risk from its malfunctioning,
which can vary. So, we can’t go just by formulae here.
Apart
from the issue of sharing the surplus, the RBI should be left alone by the
government to decide on the right course of action. This derives not so much
from a notion
of central bank independence as it does from the point of view of a credible
governance policy. The Government of India would have chosen the Governor,
participated in the choice of his deputies and had a say in the appointment of even
the independent members of the central board of the RBI. In addition, the board
has representatives of the government on it. It should now be left to this body
to decide on the precise corrective action for banks with high NPAs, the
desirable state of liquidity and the prudential norms to be observed by banks.
The RBI is the banking regulator after all, and for the government to attempt
to direct it would constitute micro-management.
Stability of the economy
Stepping away from legal niceties, there is reason to
believe that some of the actions being sought to be imposed on the RBI today
could jeopardise
the stability of the economy. While acting as the lender of last resort
can be stabilising, under no circumstances would it be advisable to lower
prudential norms in the presence of stressed banks. The government’s concern
for the health of the medium and small enterprises is well-founded. After all,
they were among the most affected sections following the demonetisation of
2016. If, in the spirit of contriteness as it were, the government wants
to reach out
to them, the right course would be to provide interest rate subvention,
rather than to force the RBI to tweak its lending norms. There is a severe lack
of judgment in loan melas promising online
sanction in less than an hour. There is the suggestion in this of the political
business cycle, a government trying to nudge the economy prior to an election. The
resistance of the RBI top brass to this desperate action is
understandable.
Whatever
may be the misfeasance
of the government in its recent dealings with the RBI, however, it would yet be
acceptable to review its own performance in the sphere in which it has an untrammelled
independence, namely monetary policy. Under this arrangement it has control
over the interest rate. Over 2013-2018 there has been a 5 percentage point swing
in the real interest rate in India, moving from a negative to a positive level,
making it among the highest in the world, much higher than that of China. This
is clearly the consequence of an exclusive policy focus on inflation from even
before inflation targeting was formally adopted by Parliament in India. It may
well have contributed to slow industrial and export growth, due to a real
appreciation of the rupee, and a rise in NPAs even after their existence had
been recognised. If this is the monetary policy that central bank independence
brings with it, we might just be a little sceptical of the value of the
independence itself.
Enabling job creation
There
is a certain populism
inherent in privileging inflation control to justify extraordinarily high
interest rates. While it would be bad economics to tolerate high inflation, the
absence of inflation by itself only benefits those in employment, it does not
assure jobs to the unemployed. Thus a monetary policy that ignores the impact
of its actions on unemployment is not credible. Interestingly, the government
and the RBI have always been on the same page as far as inflation targeting is
concerned. The populist
message that inflation erodes the income of the poor conceals the possibility
that in the implementation such a policy could hold back job creation by
restricting investment. The rising current account deficit, the slow growth of
employment and the disappointing performance of manufacturing, the sector most
closely affected by high interest rates, should prompt us to review how
monetary policy is conducted in India. In the past, the RBI had a ‘multiple
indicators approach’ which paid attention to inflation, growth and the current
account. This may not have borne the precision conveyed by ‘inflation
targeting’ but it did answer to Keynes’s dictum, “It is better to be vaguely
right than to be precisely wrong.”
01. Inflation targeting (noun) – a monetary policy
strategy used by central banks (by making “target” inflation rate publicly) for
maintaining prices at a certain level or within a specific range.
02. On the same page (phrase) – in agreement.
03. Rationalise (verb) – streamline, make more
efficient, hone/simplify.
03. Make sense (phrase) – be accepted, be
credible, hold up.
04. Unconstrained (adjective) – uncontrolled,
unrestricted, unlimited.
05. Inflation (noun) – Increase of price level of
goods & services & vice versa decrease of currency value.
06. Conceded (verb) – admit, acknowledge,
accept,/allow.
07. Interlocutor (noun) – a person who takes part
in a dialogue or conversation.
09. Federal Reserve (US) (noun) – the central
banking system of the United States (The Reserve Bank of India (RBI) is India’s
central banking institution).
10. Trade-off (noun) – a situation in which you
must choose between or balance two things that are opposite or cannot be had at
the same time; a compromise; swap, exchange.
11. Hue (noun) – character, aspect, appearance.
12. Husk (noun) – covering, seed case, shell (of
some seeds/fruits).
13. Spat (noun) – argument or quarrel for nothing.
14. Playing out (phrasal verb) – happen, occur,
take place.
15. Stressed banks (noun) – troubled banks; the
banks with stringent capital requirements.
16. Prudential (adjective) – showing care and
forethought, especially in business.
17. Bailiwick (noun) – department, domain, sector.
18. So to speak (phrase) – in a manner of
speaking, in a way, to some extent.
19. Reserves (noun) – funds (resources as stock/reservoir).
20. Commensurate (adjective) – equivalent/equal,
comparable, proportionate.
21. Notion (noun) – idea, belief, conception.
22. Credible (adjective) – convincing, acceptable;
reasonable/valid.
23. Say (noun) – influence, authority, voice.
24. Stepping away from (phrasal verb) – avoid, not
involved in something.
25. Niceties (noun) – fine point, subtle detail,
fine distinction/factor.
26. Jeopardise
(verb) – threaten, endanger/imperil, put in danger/put at risk.
27. Last-resort (phrase) – temporary solution,
expedient, makeshift.
28. Contriteness (noun) – regretfulness,
repentance, remorse.
29. Reach out (phrasal verb) – hold out, extend,
outstretch.
30. Subvention (noun) – a grant of money
(subsidy) provided by the government to help some sectors.
31. Nudge (verb) – encourage, prompt, stimulate.
32. Top brass (noun) – very important/famous
people in authority.
33. Desperate (adjective) – last-minute, risky,
hasty.
34. Misfeasance (noun) – deceit, dishonesty,
duplicity.
35. Untrammelled (adjective) – uncontrolled,
unconstrained, unrestricted.
36. Swing (verb) – change, alter, shift.
37. Populism (noun) – policies that supposedly
represent the opinions of ordinary people .
38. Populist (adjective) – relating to the
politicians who claim that they are representing the common/ordinary people.
39. Borne (verb) – produce/yield, give, provide.
40. Dictum (noun) – saying, maxim, proverb.
41. Vaguely (adverb) – roughly, indeterminately,
nearly.
42. Precisely (noun) – exactness, accuracy, correctness.
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