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Opinion » Comment

Updated: November 1, 2012 00:22 IST

Walk the talk, Mr. Finance Minister

Raghuvir Srinivasan
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IN STEP? The central bank has been extremely understanding of the government’s constraints.
Photo: The Hindu IN STEP? The central bank has been extremely understanding of the government’s constraints.

The government must deliver on promises and then wait for the RBI to act

P. Chidambaram is hurt and angry. He is hurt that the Reserve Bank of India (RBI) has not helped him with a rate cut. And he’s angry that the Old Lady of Mint Street has refused to do his bidding.

The Finance Minister is piqued that RBI Governor D. Subbarao refused to succumb to the brazen, public pressure brought on him to cut the policy rate. The insinuation from Mr. Chidambaram’s statement on walking alone — which will probably rank alongside the “I don’t lose sleep over the markets” quote of Dr. Manmohan Singh when he was finance minister, as a quotable quote — is that the governor doesn’t care about growth.

But does he have to? The central bank has multiple responsibilities, the two important ones being managing inflation and creating favourable conditions to promote growth. Based on the prevailing economic situation, the central bank shifts its weight to one or the other of its two primary mandates. In its wisdom, it is now focusing on controlling inflation and maintaining monetary stability. Dr. Subbarao may be concerned about the growth slowdown, as he indeed said on Tuesday, but his bigger worry now is about holding prices.

But what has the government on its part done to rein in the fisc and promote growth?

In the last one month and more, diesel prices have been marked upwards a wee bit while the cooking gas subsidy has been capped. There have been measures to drive capital inflows from abroad by loosening FDI norms in sectors such as retail, pension and aviation and also making it easier for companies to raise funds abroad. Suitable noises were also made about raising funds from disinvestment to bridge the fiscal deficit.

And then came the grand press conference on Monday, on the eve of the RBI’s policy announcement, where Mr. Chidambaram laid out a “road map” for fiscal consolidation promising to rein in the fiscal deficit to three per cent by 2017. Forget for a minute that this was a not so subtle move to exert pressure on the central bank to cut rates the next day. Did the Finance Minister really expect the RBI to act based on mere statements of intent? Especially in the light of its recent experience, notably in the Budget, where the then Finance Minister, Pranab Mukherjee, made promises that were not kept?

Itself to blame

The fact is that the government has only itself to blame for the growth slowdown. High interest rates are certainly an important factor but not the factor for the slowdown in the economy which is directly traceable to the policy inaction of the last three years. Projects have been held up for want of environmental clearances and due to land acquisition problems. The Land Acquisition Bill, good or bad as it is, would at least have cleared the way for projects to proceed but it has yet to see the light of day. An important factor behind the slowdown is the lack of adequate power supply not to talk of the scams tumbling out everyday which are also holding up decision-making by bureaucrats who are keen to cover their backs even at the cost of inaction.

So what are we talking here about the RBI not supporting the government in driving growth? If anything, the central bank has been extremely understanding of the government’s constraints and did its bit by “frontloading” a 50 basis point rate cut in April based on assurances by the government of reining in the fisc. It has also been regularly pruning the cash reserve ratio in order to free up liquidity, which in itself is a measure that can lead to a fall in interest rates. Remember, despite the tight leash on the policy rate by the RBI, inflation has remained sticky. Given its core mandate of inflation targeting, the RBI could certainly not be expected to loosen its policy.

Dr. Subbarao deserves a round of applause for standing up to the government and remaining focused on the important job of reining in inflation. Cynics may say that given that he has only another year to go, he does not have to please anyone and could therefore afford not to bend. Yet, he has proved himself to be a worthy successor to Dr. Y.V. Reddy who in his time also staved off tremendous pressure from the government on the issue of cutting rates. Though reviled then for his hawkish stance, Dr. Reddy is today acknowledged as the man who kept the global financial turbulence from washing onto Indian shores. It is the karma of central bankers, not just in India, to suffer pressure from their governments but few have managed to hold their own as Dr. Reddy did then and Dr. Subbarao is doing now.

As for growth, it is now for the Finance Minister and the government to walk the talk; convert all the tall promises made into action on the ground. And then wait with hope for the RBI to act!

raghuvir.s@thehindu.co.in

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Well done Subbarao. Hats off to
you.

from:  Kasi sundaram
Posted on: Nov 1, 2012 at 18:25 IST

Very perceptive article. Kudos to the RBI for not buckling down under the bullying and to you Mr. Raghuvir for calling it as it is.

from:  Usha
Posted on: Nov 1, 2012 at 17:44 IST


Excellent article. The RBI needs to be congratulated for standing up and doing what it thinks is correct. This Govt. has very little credibility when it comes to its promises on the fiscal front. The food security bill will most certainly be implemented well in time for the general elections without other cuts in wasteful spending. The RBI has walked the extra mile not only by front loading the cuts, but also by the cuts in the CRR. The Govt. must show some serious action and not just intent as far as spending cuts are concerned.

from:  Srikanth Iyer
Posted on: Nov 1, 2012 at 17:18 IST

It is not the question of walking alone, its a shared responsibility
of the Government and the Central Bank of the country. The Government
should show results and the intent. Everyone knows what happened to
the FRBM. The Monday Press meet was almost a replica of FRMB in a new
bottle. Was the government able to achieve FRBM targets in the past
and will they be able to do it now is the question. RBI is justified
in seeking action than mere words. And as rightly pointed out by the
author, interest rate is not the only factor which impacts growth. Let
the Government walk the talk.

from:  sarboji
Posted on: Nov 1, 2012 at 11:57 IST

The recent miffing up of FM at the RBI over not decreasing the key policy rates seems to be just about difference in priority being given by FM and RBI Governor, on one hand where Ministry advocates for more money inflow into the market to augment the growth, which in the current scenario may lead to soaring of Inflation, at the same time RBI wants to tame Inflation keeping common people in mind who are worst affected. In a sense RBI seems to have done a tremendous job by withstanding the pressure and hence, has shown the world that it is an autonomous body which definitely thinks for the growth of the country, but at the same it won't forget the common people as well. The decision of RBI becomes more apt when we see it in the perspective that the pass through on account of higher diesel and LPG prices is yet to be fully reflected,Non-food manufactured product inflation is high and rural wages are up without any commensurate increase in productivity. In short, there is no reason to reduce key rates at current scenario.

from:  Rahul Gautam
Posted on: Nov 1, 2012 at 08:05 IST

The problem in the country is the people who didn't see the downturn
coming and who didn't understand how the downturn came about are still
in charge of fixing the economy. Better results should not be expected.

from:  Satish
Posted on: Nov 1, 2012 at 07:07 IST

A very well articulated article. Euro crisis should have given the
Government a lesson to prune the revenue side of the budget. RBI, the
doctor who knows the health of the economy has prescribed the right
and bitter medicine for the day and we Indian citizens, industrial
houses,Government have to swallow the bitter pill in the long term
interest of our Nation to arrest the accelerating rate of inflation. Accelerated Growth is important but can wait and definitely not at the
cost of inflammable inflation. Cutting the interest rate is just like
accelerating a Car with highly inflated tyres in a highway that may
result in disastrous consequences. Well done Subbarao. Hats off to
you.

from:  krish
Posted on: Nov 1, 2012 at 06:04 IST

One more indicator that the system of checks and balances exist to some extent in India -- only when it is separated, to some extent, from the government. RBI and CAG being the examples. Thanks to these financial institutions and the erudite men that run the place, the run away banking system that caused all the turmoil elsewhere does not exist in India. It is for the government to step in to fill the boots of a run away elephant which will trample every safeguard mechanism to protect common man. The dance to the lines of the west by taking populist and knee-jerk decisions like FDI in every sector. One wonders if the government is only to disrupt the system than enable the system. I just hope the elephant does not ride all the way to RBI!

from:  Dheeraj K
Posted on: Nov 1, 2012 at 05:10 IST

There is a distance to be traversed from "Road maps" and "White Papers" to 'State' Policy referred to in the Peoples' Law of Law Making in Chapter IV of the Constitution and in Article 263.The 'State' Policy on Stabilization as a component of the 'State' Policy on Budget may have to be discerned by law already enacted in various central and state statutes including the law relating to the functions of the central bank.

from:  K.Sethuraman
Posted on: Nov 1, 2012 at 03:17 IST

A discerning analysis. Congratulations, Mr.Raghuvir Srinivasan

from:  Soundararajan Srinivasa
Posted on: Nov 1, 2012 at 01:00 IST
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