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The politics behind FSDC

The politics behind FSDC
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First Published: Mon, Sep 13 2010. 11 55 PM IST
Updated: Mon, Sep 13 2010. 11 55 PM IST
A Mint report on Monday highlighted how the Union government is trying to speed up the creation of the Financial Stability and Development Council (FSDC) this fiscal. The word “development” in the acronym FSDC should be noted: It is a potential Trojan Horse at the hands of our politicians.
In his budget speech, finance minister Pranab Mukherjee had said FSDC would “help to strengthen and institutionalize the mechanism for maintaining financial stability”. Later on, in a finance ministry discussion paper on FSDC, it was mentioned that there “is a need for an institutional mechanism that can coordinate and oversee the reform and development agenda for the financial markets as a whole”. The two statements should be read together.
The argument that FSDC will help “institutionalize” the mechanism for maintaining financial stability is a tad disingenuous. In any crisis of financial stability, the central bank of a country plays a key role. Be it changing interest rates in response to an emergent situation, evaluating risk to the economic system and providing credit in a crisis of confidence, the central bank has the tools required to overcome the crisis. Attempts to change this institutional state raises two questions: One, what difference will it make if the finance ministry is brought in as an actor, at par with the Reserve Bank of India (RBI)? Two, does the finance ministry have the skills required to carry out these complex and specialized tasks?
Then there is the more insidious issue of the “development” agenda for FSDC. In recent years, there has been a vast increase in government expenditure, mostly on the social sector. If the economy continues to grow at 8-9% per annum, the buoyancy of tax revenue is sufficient to keep deficits getting out of hand and pose macroeconomic problems. But if the global economic outlook darkens, then taxes may not keep pace with politically motivated spending. Hence the search for “political” solutions to the spending problem. The danger with the “development” agenda is that it will make monetization of deficits look like an attractive option precisely at that point of time when it should be avoided.
India today is no longer the India of the 1970s when loan melas and automatic monetization of deficits could proceed without ado. Autarchy is dead. It is best that “solutions” of that age are not smuggled through the rear door in the name of development.
Will creating FSDC erode RBI’s independence? Tell us at views@livemint.com
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First Published: Mon, Sep 13 2010. 11 55 PM IST