Finding the right balance at the central bank

Mains Paper 5: Economy
Prelims level: RBI Governor
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth,
development and employment

Context

•  The appointment of Shaktikanta Das, a competent and trustworthy bureaucrat, as the 25th governor marks the end of a recent reformist shift in government thinking, irrespective of ideology.
•  The new approach internalised that the adoption of modern monetary management in India also favoured individuals with strong macroeconomics- or financial markets-related domain specialist knowledge to be RBI governors.
•  That was viewed as a bonus in dealing with the complex global landscape that the Indian economy is inextricably intertwined with.
  Background
•  It is worth emphasizing that the creator of money in modern banking shouldn’t be the handmaiden of the big political stakeholder-spender.
•  Also, RBI, as the banking regulator, shouldn’t have to bend each time the government, the biggest shareholder of public sector banks and the main cause of their misery, and susceptible to pressure from business groups, orders a dilution of the fitness diet because the patient is whining.
•  The RBI is always a convenient target, but it isn’t the main reason why growth has disappointed.
•  The government is advised to do some introspection regarding its actions and inactions.
•  The RBI’s accountability should rightfully be to Parliament, or to its properly constituted board.
•  The current composition of the RBI board lacks the core competency and also includes several government nominees and potentially members with vested interests.

What are the reforms needed to be taken up by the RBI governor?

•  The differences in opinion will often exist. However, domain specialization doesn’t mean a licence to be selectively accountable, or to switch off the common sense approach to communication and consultation.
•  The governments cannot continue treating the RBI like a vacuum cleaner.
•  The central banking isn’t a popularity contest. Given the sweeping powers the current RBI Act gives to the government.
•  It is only the strength of the spine of the RBI governor that prevents a government from bulldozing its way through with politically self-serving and reckless initiatives that could compromise long-term economic stability.
•  The legality of an initiative isn’t the final word on deciding if it is responsible and in our long-term interest.
•  The central banks are prone to forecasting errors. This isn’t appreciated by those who don’t have to be accountable for forecasts, or by those blessed with selective amnesia about their own forecasts.
•  Recall that the majority was singing the same worry in October when Brent oil prices were threatening to march towards $90-100 per barrel.

Way forward

•  The RBI should review its forecasting track record and explain the misses to enhance its transparency and credibility.
•  Also, liquidity management is one of the most basic jobs of a central bank.
•  It is worth exploring why the RBI has often struggled with it and done a dissatisfying job of answering the concerns.
•  There has to be a greater focus on ensuring sustained macro stability, not just enjoy it as a lucky outcome.
•  India’s growth is frequently interrupted by concerns about macro stability because policymakers rely heavily on optimistic assumptions and insufficient policy buffers.
•  People in government pump up how big the Indian economy will be in 10-20 years, but there is no thoughtful assessment of how to get there.

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Prelims Questions:

Q.1) The “capabilities approach” of Amartya Sen brings a paradigm shift in the way poverty is being looked at by policymakers. Suppose if “not having a cycle” is generally termed as poverty, then which of the following positions will be taken by this approach?
1. A person who has a cycle but cannot use it will still be called as poor.
2. A person who does not have cycle will not be termed poor because not having a cycle does not make the person necessarily “unhappy”.

Which of the above arguments is\are correct in this context?
a) 1 only
b) 2 only
c) Both 1 and 2
d) None

Answer: A

Mains Questions:
Q.1) What are the reforms needed to be taken up by the RBI governor to sort out the relations between the RBI and the Union government?