BackOpinion | Public grandstanding is not public service
Whether it is the government or the central bank, public grandstanding is to be avoided
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The National Democratic Alliance government could be excused for thinking that there is a conspiracy against it aimed at diminishing its re-election chances next year. First, the Supreme Court inserted itself on a matter that was best left to the society to resolve, if some genuinely yearned for the blessings of Lord Ayyappan at Sabarimala and were denied the opportunity to do so. The spat in the Central Bureau of Investigation is unedifying and seems to have many layers. To end the week, a deputy governor of the Reserve Bank of India (RBI) chose to administer a strong dose of advice to the government on how to conduct itself vis-à-vis the central bank. Perhaps, he laid it on a bit too thickly. As we survey the world, it is not clear as to who is in need of greater disciplining—governments, financial markets or central banks or all three.
Viral Acharya drew our attention to the case of the American president criticising the Federal Reserve chairperson for raising interest rates. However, he forgot to point out that, instead of disciplining him for interfering with the much-vaunted and least questioned central bank independence, financial market types are joining the president, swallowing their revulsion towards his politics and policies. They proclaim that the president might be right. See, for example, ‘Stock Market Strains Send Message the Fed Doesn’t Want to Hear’, Bloomberg, 27 October.
Financial markets are no different from governments with regard to central bank independence. They favour it as long as central banks keep topping up their punchbowls. Further, the less said about the disciplining powers of the financial markets, the better. If they were rationally discounting future cash flows with an appropriate risk-adjusted discount rate, the Indian Sensex had no business scaling 21,000 points in January 2008 even as the long-term ill-effects of the policies of the United Progressive Alliance (UPA) government were coming into view. Nor is there any justification for the sovereign bonds of certain European countries to be trading at where they are, as it is the case with China sovereign paper. Therefore, before the wrath of the financial markets descends upon errant governments and sets off economic fires, someone has to teach the markets the concepts of risk and premium for risk.
Finally and importantly, we know that central bank independence combined with inflation targeting provided intellectual cover for the political economy project of shifting the balance of power away from labour towards capital whereby rising wages needed to be resisted and rising real estate and stock prices did not have to be. So, one has to be careful in enlisting the support of a rogue to discipline the government. I would go further and assert that, globally, central banks have won independence from governments only to be captured by financial markets.
However, the deputy governor’s arguments have substantial merits in the Indian context. This columnist has argued, in these pages, more than two years ago, that the government should allow RBI, the chief economic adviser and the vice-chair of Niti Aayog to speak their minds on government policies and actively encourage them to be its devil’s advocates. He is right that raiding the central bank reserves for one-time fiscal management will erode the government’s fiscal credibility and if the Indian bond yield (remember, financial markets are partial to developed countries) went up, the government might end up paying more to bondholders than what it receives from the central bank.
He is right to argue that the payments regulator should be housed within RBI rather than being an independent regulator. Regulation of banks to be made ownership-neutral has been a longstanding demand of RBI and that is a reasonable demand. He did not mention one more issue and that is the question of relaxing the prompt corrective action (PCA) on some of the public sector banks. That too will be ill-advised. The government has to use the crisis in bank debts to bring about better governance and commercial discipline and skills in loan appraisal. Relaxing the PCA will send the wrong signal. Here, the long-term benefits of non-dilution of PCA far outweigh the short-run liquidity considerations.
Acharya invokes the three-part article written by Rakesh Mohan, a former deputy governor of RBI, recently in Business Standard. For the record, particularly on the matter of “pursuing steady attrition and erosion of statutory powers of the central bank through piecemeal legislative amendments that directly or indirectly eat at separation of the central bank from the government", Mohan had made two observations that are worth noting. One is that the UPA government, after the carve-out of the department of financial services from the department of economic affairs, a provision was made for a second non-voting government nominee on the RBI board and that this provision made it through the Parliament without any discussion.
The second one was the amendment made in 2013 to have directors leave promptly at the end of four years without appointing their replacements promptly. The earlier practice was to let them continue until a replacement was made.
Whether it is the government or the central bank, public grandstanding is to be avoided. The nation does not have to know who is right. The nation wants them to speak to each other and govern together.
V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk.
Comments are welcome at views@livemint.com
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