I initially intended to write this piece as a critique of the treatment given to the Reserve Bank of India by the executive authorities. However, a more productive approach would be to work on the mechanism of strengthening institutions and their interface with each other.
Friends such as YV Reddy and Bimal Jalan have already expressed their criticism in civil, technical, and compelling language. The relationship between a central bank and the executive is at best rocky, needing considerable skills and patience in working on the policy strategies to be followed. This is in order to achieve stable domestic prices, avoiding volatility in exchange rates, and pursuing capacity utilisation and employment objectives.
Clear signals
It was obvious from the body language that the RBI was not involved in the decision to demonetise. This has now been officially confirmed in a statement of the central bank to the Public Accounts Committee of Parliament. For a bureaucracy to send a stern, politically worded request to the RBI regarding a decision of this magnitude which lies squarely within the powers of the central bank by is effrontery of the highest order.
The process had started earlier with the civil service getting involved in the selection of the governor of the RBI. In other democratic countries, the autonomy of the central bank is treated with the highest respect. It is only in the erstwhile Soviet Union block of countries that the governor of the central bank was a low-level official.
No more arm-twisting
The Government owes an explanation to the country for going back on the traditions of decades. More important, we must lay down the convention that the Government does not arm-twist the central bank on issues relating to currency and exchange rates.
More has to be done to hone institutional mechanisms, yet the ultimate decision has to be that of the central bank. In my decades of experience with the Planning Commission, resources were always a contentious issue. Yet, ultimately, the planners had the good sense to go along with the judgment of the central bank. The resource group was chaired by a deputy governor of the RBI.
Governor Urjit Patel should be congratulated for clarifying to Parliament and the country that he and his institution were not party to the ultimate round of discussions for the decision. It is, of course, true that questions of long-term changes are always discussed by policymaking agencies such as the RBI. This is reflected in a number of documents that are released, such as the annual report, the economic survey, the trends and progress in banking, and now, the stability reports. But no one agency tries to superimpose its views on others. Now this compact has been violated.
What is the way out? One method is perhaps to set up an institution with, say, three ombudsmen. They could provide the buffer for institutions to maintain autonomy. This may seem superfluous because it is the responsibility of the executive in a democratic society to nurture the autonomy of institutions such as the judiciary, the Election Commission of India, the central bank and the University Grants Commission. Yet, if this unstated rule is not followed, what is the way out? As a Latin proverb asks “Who will guard the guards?”
Towards a solution
What about planning, and the future of institutions that require a decision today, and which have long-term consequences, when the Planning Commission has been abolished? What happened after November 8 is quite clearly a haircut which led to large-scale displacement of human resources. Skilled labour went back to the villages, machines and factories became idle. Logically, when it can’t get worse, it can only improve. Arvind Panagariya, vice-chairman of the NITI Aayog, has talked about the need to reduce the tariff rate for gold imports and the interest rates for small business.
Similarly, noise has been made on tax cuts. The issue is that of a massive public investment programme to crowd in private investment. A lot of this could be in the public-private partnership mould. This needs fiscal engineering.
With most of the currency back with the central bank, there is no possibility of a dividend from that source.
With the currency back in his balance sheet and the fact of the reverse flow of billions of dollars out of India, Urjit Patel is wisely resisting reducing interest rates. In other words, we will need resource raising efforts to up investments, to demand the revival of the sectors hit.
The worry is that the economy, already weakened by its drastic haircut, will be subject to recession without the umbrella of a fiscal momentum.
It can only be hoped that the Budget will provide for this. If it cannot be designed by end-January, why not wait? There is no logic in preferring January end to March.
If there is an economic logic for changing the Budget date, it should coincide with the agricultural season. Kharif crop sowing in India is in June and therefore a date in mid-May or early August, either before or after the acreage figures are in, seems logical.
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