Mutual trust and respect must be reinforced amongst RBI and finance ministry top brass
Difference of opinion between RBI and the NDA government on interest rates, inflation projections and economic growth in itself is not bad at all. But, not being on talking terms is a serious cause for concern.
Finance ministry officials and monetary policy committee (MPC) team headed by RBI governor Urjit Patel must continue to engage, talk, discuss and exchange notes on every possible monetary policy issue. Definitely, the lines have to be drawn between the two. MPC is well within its right to take an independent call on interest rates having implications for consumption of goods and services, thereby, impacting economic growth. Without interference or counselling on what should or should not be done, RBI must be allowed to make its own projections on every possible macro-economic parameter that will allow it to take a call on interest rates and inflation management. This independent exercise should only be strengthened and widened with diverse inputs especially with a multi-member monetary policy committee in place.
On the other hand, finance ministry cannot be denied its right and responsibility in managing all growth parameters, design policy framework including taxation and finally deliver on the economy front given that its solely responsible to Indian Parliament and subject to public scrutiny. Finance ministry has not erred in making its separate assessment of growth prospects and inflation to make out a case for cut in interest rates. The growth versus inflation debate is not new and as we saw with governor D Subba Rao too, the UPA government constantly pushed the envelope but to no avail.
What’s not acceptable is RBI and finance ministry stepping on each other’s toes when their roles are clearly defined. Public sparring should also be desisted in order to maintain the credibility of both the institutions, RBI and finance ministry. These overlaps have come at a time when the monetary policy committee with independent members and government nominees are just settling down. In any case the MPC was created to fetter the central bank in a way.
One can argue that it was the Modi government that took the initiative to set up the MPC and ease the burden of RBI governor, to get the best of experts to advise the central bank on monetary policy issues. So, doubting the intentions of Modi government may be easiest but not entirely true.
Going forward, a mechanism needs to be put in place for RBI, MPC and finance ministry to engage and exchange notes on GDP growth, inflation and interest rate related issues. While RBI’s autonomy is paramount, MPC has no business to say that it will not even talk or meet with finance ministry officials before a policy review. There’s no harm in hearing out government officials and the North Block’s assessment in parallel. Interestingly, the MPC too was coloured in the RBI’s hue on the matter displaying independence of mind and intent.
Coming to RBI’s decision to keep key rates unchanged at a time when the government has been virtually nudging Mint Street to bring down the rates on the back of modest inflation, prospects of good monsoon and crude prices hovering between $50-60 per barrel. Chief economic advisor Arvind Subramanian may even be right in expecting inflation to be lower at 2-3 per cent vis-à-vis RBI projection of 3.5-4 per cent. But for him to publicly berate the RBI is unwarranted. Moreover, he was equally caustic about RBI’s inflation watch and targeting which has gone awry in the past.
But interest rates may not be only reason for the slowdown of the economy with GDP growth touching 6.1 per cent in fourth quarter of last fiscal. Economy has been slowly decelerating even before demonetisation and this is now empirically evident. Non-availability of liquid funds with banks especially after the demonetisation of high value currencies may not be the entire problem.
Government must fully appreciate that public investments in billions of dollars alone will not spur economic growth. Both domestic and foreign private investments will have to flow unhindered to fire economic growth on all cylinders. Coupled with healthy savings growth of over 35 per cent, comfortable foreign reserves of over $ 379 billion, there’s no reason why the economy cannot get into a high growth trajectory.
Mutual trust and respect must be reinforced amongst RBI and finance ministry top brass. Coordinated efforts by the two will make economic management that much easier, sustainable and long lasting.