RBI must emulate FM’s transparency on failure to meet targets

Instead of the promised fiscal deficit of 3.3% of gross domestic product (GDP) in 2019-20, she presented a revised estimate of 3.8%, and instead of the earlier fiscal deficit projection of 3% for 2020-21, she proposed a deficit of 3.5% of GDP.

The growth in revenue collections was tepid, Sitharaman said, explaining the slippage and seeking to use the escape clause in the Fiscal Responsibility and Budget Management (FRBM) Act.

At the time, the finance minister drew criticism for failing to sufficiently justify the deviation from the targets the FRBM Act specified and bound the government to, and the conditions in it that she had used to invoke the escape clause.

Within weeks, though, none of this mattered as the pandemic, resultant lockdowns, and their impact on the economy blew up the government’s fiscal consolidation roadmap.

The fiscal deficit flared up to 9.3% in 2020-21 as tax collections were hit even as spending on Covid-19 relief shot up. The Centre’s fiscal deficit was 6.7% of GDP in 2021-22. It is going to be 5.9% of GDP this year.

The point, though, is that the finance minister did not once shrink away from stating in Parliament why she fell short of the fiscal deficit target commitments specified by law.

She let analysts examine the implications and did not try to prevent a public debate on the matter even when fiscal hawks criticised the slippages. Yes, the FRBM Act made it incumbent on the government to be transparent, and she did not try to invoke national economic security to trip the law.

The Reserve Bank of India (RBI), however, is not a believer in transparency, it would appear. The central bank failed to meet the flexible retail inflation target of 2% to 6% for three straight quarters between January and September 2022.

As required under the amended RBI Act of 1934, the central bank subsequently explained this failure to the government in writing. The act’s provisions also require the RBI to list the remedial actions it plans to take to return inflation to the target and estimate how long it will take to achieve this.

But Parliament has not been able to debate the RBI’s failure or the steps it has taken in response to it as the central bank’s explanation letter is being kept secret.

Both the government and the RBI resolutely refuse to be transparent about the explanation or allow Parliament to debate the matter, citing reasons that range from confidentiality clauses to the lack of a legal requirement to release it.

Mint filed queries on the matter under the Right to Information (RTI) Act but the central bank has in its response refused to disclose the measures being taken to contain inflation.

In December, the RBI first rejected Mint’s RTI request without specifying a reason. When Mint appealed this decision, the appellate authority asked the central public information officer (CPIO) to review the response. The response gives bizarre reasons in defence of the opacity.

First, the central bank said that public disclosure of confidential correspondence from RBI to the government, especially those that contain remedial actions, can “unmoor expectations and impede monetary policy transmission". This, in turn, can dampen growth prospects and hurt the state’s economic interests, the RBI said.

This, it must be said, is nothing but fear-mongering. How can a public debate on the efficacy of monetary policy hurt the state’s economic interests? Isn’t this encouraged on matters of fiscal policy?

The RBI’s second excuse – that is that there’s no legal requirement for it to make the information public – is a weak line of argument. “The information is exempted from disclosure under Section 8(1)(a) of the RTI Act," RBI’s CPIO Manish Kapur said in response to Mint’s efforts.

Making the letter public would be in the public interest. If the RBI decides to be as transparent as Sitharaman has been about the fiscal deficit, the risk premium on government borrowings could potentially fall, lowering the cost of the government’s debt, resulting in savings to the exchequer and smoother functioning of the money markets.

The RBI has offered a third excuse for its lack of transparency. Governor Shaktikanta Das, who played key roles in demonetisation and passing amendments to the RBI Act to implement the inflation targeting regime, has taken shelter in bureaucratese, saying the explanation letter is “privileged" communication between the government and the central bank.

What the RBI seeks to gain from its secrecy around inflation, which affects every Indian, is hard to grasp.