Opinion | Ill winds blow on Mint Road
The appointment of S. Gurumurthy to the RBI board suggests that the government is abandoning conventional economics in favour of its putative Indic alternative
The last instalment of this column decried the government’s turn toward trade protectionism, abandoning a quarter century’s commitment to trade liberalization (or, at a minimum, not sliding back into protectionism). If one harboured the hope that this was the only domain in which slippage was evident, one would be sadly mistaken.
There are early warning signs that the Narendra Modi-led government is starting to turn the screws on the Reserve Bank of India (RBI) and its governor, Urjit Patel. After the departure of NITI Aayog vice-chairman Arvind Panagariya last year, and chief economic adviser Arvind Subramanian earlier this year, Patel is, quite literally, the last man standing—by which I mean the last credible and serious US-educated economist operating within the system. Patel, who holds a doctorate in economics from Yale University, where his supervisors included the noted macroeconomist Willem Buiter and well-known trade economist T.N. Srinivasan, is by any measure one of the world’s top central bankers. And, latterly, after the dust has settled on demonetization, he has amply demonstrated his independence and refusal to buckle under pressure from the government, whether on interest rate policy or the functioning of the bankruptcy procedure. Clearly, the mandarins in North Block are not happy—nor are their political masters in South Block.
That is why one should not discount recent changes in the membership of the RBI’s board. The full-time directors are the governor and four deputies, along with two secretary-level ex officio members from the Union ministry of finance representing the departments of economic affairs and financial services. In addition, there are 10 part-time members. This is where troubling signs of change are now evident.
Earlier this year, S. Gurumurthy, convener of the Swadeshi Jagran Manch (SJM), was appointed to the board. A chartered accountant by profession, he is widely seen as the intellectual architect of the demonetization policy, and his views on economics can most charitably be described as heterodox. Less charitably, he is one of a tribe of veritable snake oil hucksters who are peddling “Indic economics” or “Hindunomics” to a receptive Modi government. Such folk evidently believe that India, with its Hindu heritage, is immune to the laws of conventional economics, and that a better understanding of economics may be found in Hindu texts and traditional practices than in the conventional textbooks from which academic economists teach their students.
But adding Gurumurthy to the board was only the first step. The SJM has for some time been calling for the ouster from the board of Nachiket Mor, alleging a conflict of interest given his directorship of the Bill & Melinda Gates Foundation. That has now happened, creating a vacancy on the board that almost certainly will be filled not by someone conventional such as Mor —who happens to have a doctorate in economics from the University of Pennsylvania—but by an acolyte of Indic economics.
It is rather obvious that the end in view is a watering down, if not an outright rubbishing, of the Monetary Policy Framework Agreement, by which monetary policy is set by an independent monetary policy committee that is free from government interference. As it happens, the adoption of inflation targeting as the agreed upon monetary policy framework originates with a report authored by a committee headed by Patel, who is a staunch advocate of inflation targeting.
While there are legitimate academic debates about the merits of inflation targeting, in the wake of the global financial crisis, none of the critics has been able to offer a credible and viable alternative policy framework. Whether anyone likes it or not, inflation targeting remains the best practice among alternative policy frameworks. Indeed, one may show, in the canonical Clarida-Gali-Gertler new Keynesian macroeconomic model, that inflation targeting may replicate, or at any rate approximate, the theoretical optimal solution for monetary policy aimed at minimising deviations of output from its natural rate.
What is more, in the context of an emerging economy such as India, inflation targeting carries a political economy rationale in addition to the strictly economic rationale based on the orthodox theory of monetary policy formation. In particular, it insulates the central bank from political pressure to lower interest rates and imposes a penalty on an exchequer that indulges in fiscal profligacy—for loose fiscal policy feeds through into inflation and this in turn would lead to interest rate increases, other things being equal.
As it happens, one of the trio of economists who constructed the canonical model, Richard Clarida, who taught me macroeconomics at Columbia University, has recently been confirmed by the US Senate as vice-chairman of the Federal Reserve, the US central bank, having been nominated by President Donald Trump. Ironically, Trump’s choices for the Fed have hewn closely to conventional wisdom, while the appointment of Gurumurthy to the RBI board suggests that the Modi government is abandoning conventional economics in favour of its putative Indic alternative.
Someone close to the process told me ruefully that, with inflation targeting, India got a better monetary policy framework than we deserved. These words may yet prove prophetic.
Vivek Dehejia is resident senior fellow at the IDFC Institute, Mumbai. Read Vivek’s Mint columns at livemint.com/vivekdehejia.