Looking for some change Guv!

Pulapre Balakrishnan


So the Government of India has announced the name of the next Governor of the Reserve Bank of India. In a way, there was no great surprise. Of the three names that had been mentioned in the press as constituting the short list, Urjit Patel’s was the one most likely to come to light. First, he was already within the Bank being one of its Deputy Governors. Secondly, he has the academic pedigree by now considered de riguer for top posts in the Indian government. But, above all, he also has the advantage of being on the same page as the current dispensation in Delhi. I say the last not on grounds of the politics as much as the fact that he must agree with the new view of monetary policy legislated by parliament in April 2016 whereby inflation targeting became the main objective of the RBI. He was after all the head of the ‘Expert Committee to Revise and Strengthen Monetary Policy’ that had recommended the transition in the first place. As the RBI does not have statutory independence, it helps the Governor in the discharge of his functions that his views are shared by the government of the day, or vice versa.

            Given the statutory requirement to deal with inflation the incoming Governor of the Reserve Bank has his task cut out. Data released by the Ministry of Statistics and Programme Implementation show food inflation rising more than usual since April, the figure of over 8 percent registered in July being the highest in a while. If the government does not do anything to replenish the supply of food some potential growth will have to be sacrificed if inflation is to be controlled. The RBI itself can dampen food inflation only by restraining growth. In a sense, the GoI has absolved itself of responsibility by handing over, as it were, responsibility for inflation to the RBI. But in recent years the RBI itself may have contributed to the move by aggressively giving the impression that it can control inflation. There is reason to believe that it cannot as current research calls the claim into question. Econometric estimation by M. Parameswaran, Gurdeep Singh Lamba and myself of the inflation model presented in the Urjit Patel Committee Report reveals it as without foundation when run with Indian data, whether over the long haul or more recently. We will be presenting this work publicly soon.

            The somewhat poor performance of the RBI inflation model may be a sign that of late economic research in the RBI has been in thrall to the changing fashions of Anglo-American economics without being sufficiently empirically grounded. If this were true what then explains the fact that the inflation rate has successfully been kept within the range specified by the government? At least some part of it has to do with lower global oil prices and a generally sluggish growth environment. An instance of the latter is the slower growth, as recorded by the index of industrial production. The argument is often made that the index itself, being a physical measure, is not the best measure of income by comparison with an index of value added, as is the one provided by the Central Statistical Organisation. This may be so when it comes to measuring income but the index of industrial production could yet be a better measure of inflationary pressure. After all, the production of two ordinary cars could draw in more labour than the production of just one even when it is of a higher value. And that would generate a greater demand for food. On the whole, there is case for a review of India’s existing anti-inflationary policy and the RBI’s role in it. The occasion of a new governor taking over is exactly the moment for this. Into the early seventies the RBI had remained a major centre of research with its widely read monthly bulletin being a widely read source of information and analysis on the Indian economy. This appears to have been lost, which is great pity. The Bank appears not to have cared enough to preserve the enormous goodwill it once enjoyed among with India’s professional economists and business journalists. Of course, this goodwill was also related to the perception that the RBI was relatively independent of the government. And the RBI itself was intellectually open too as evident in the external opinion that it entertained. A particularly memorable moment for me as a professional economist in this country was in September 1991 when the Bank invited its independent economists for advice on how to deal with the balance of payments crisis. I recall over twenty economists representing every shade of opinion arrayed in the conference room and the Governor responding most impressively to every speaker on the spot. Unusual among India’s institutions the RBI was able to give the impression of being able to effortlessly combine the transactions of a public office with a human touch. It is likely that its location away from the political capital made a difference here. Hopefully, our youthful new governor will be able to restore the intellectual capital and accessibility to the citizen of one of our most respected public bodies.         

                The debate on monetary policy, however, is a dry subject and is unlikely to impress the hoi polloi more concerned with the quality of their life. Here the role of the RBI is much greater than actually imagined. The RBI has a fairly good record of maintaining financial stability and securing the interests of bank depositors. It has come a long way since the stock market scam engineered by Harshad Mehta, which may have cut short the tenure of a most excellent governor in S. Venkitaramanan who had played a heroic but unsung role during the balance-of-payments crisis of mid-1991 when in the midst of a drift in Delhi the RBI had coolly done whatever it took to salvage the country’s meagre foreign exchange reserves and ensure that India would not default on its dues. In 2003 the RBI arranged a smooth  merger of the troubled century-old Nedungadi Bank based in Kerala with Punjab National Bank, ensuring that the money of its depositors remained safe. It seems for once national integration did not sound a hollow slogan. More recently, Governor Raghuram Rajan has made it necessary for the commercial banks to address their non-performing assets (NPAs). So, generally the RBI has done a good job of regulating India’s financial sector. Compare this with the record in the United States where a financial crisis originated in 2007 and slowly spread to the rest of the world. There Alan Greenspan, who had headed the Federal Reserve Bank for 18 years, not only failed to call out a brewing disaster but allegedly encouraged the financial sector of that country in its adventure with derivatives, new-fangled financial instruments that went on to wreck the system and plunge the world into a new normal of slower growth. By comparison, the RBI has maintained an arm’s length from the Indian financial sector, a stance wholly necessary if it is to retain its credibility as a regulator.

            However, while we as citizens of India remain grateful to the RBI for its watchfulness over our own financial sector, there is ground for some dissatisfaction in an area far more important to many Indians. Anyone who visits the bazaar, as opposed shopping on Flipkart where the goods are higher valued, would notice the shortage of what we refer to as change. There are not enough low denomination notes nor coins to be had for love or for money. So, while I am aware of the predicament of my corner shop’s owner, I am not amused at being palmed off with a piece of toffee! Is it too much to expect that a country that has minted coins since the time of Chandragupta Maurya should have some more of the stuff? Surely there is more to a central bank than a “modern monetary policy”, the government’s chosen terminology for the architecture that it has bequeathed upon the RBI. The latter must not forget that it also exists to facilitate exchange.     

            As a young lecturer at Oxford in the mid-80s when Mr. Patel was completing his first graduate degree I recall his being thoughtful, prone to due diligence, courteous and an understated member of the community. India is lucky to have a central bank Governor with these qualities.