Alok Ray
There is a case for having a Monetary Policy Committee consisting of several expert members as recommended by many, including Rajan.
Perhaps, the main reason – apart from his remarks about the new series of GDP numbers and the dangers of rising intolerance in India – behind the exit of Raghuram Rajan as RBI governor is his insistence on not lowering the policy interest rate (the so-called ‘repo rate’ at which the banks can borrow short term from RBI) unless inflation rate is brought firmly under control.
On the interest rate issue, there is certainly room for debate and Rajan’s stand, is, by no means accepted by all economists. One may agree that the prevailing ‘high’ interest rate is not the most important constraint on private investment (weak infrastructure, problems in land acquisition and getting clearances may be more important) and removing the cost and price uncertainties arising out of a ‘high’ and variable inflation rate is important for attracting investment. But that does not necessarily imply an endorsement of Rajan’s ‘hawkish’ anti-inflationary stand on monetary policy.
For instance, one may question how the inflation rate should be measured – by WPI (Wholesale Price Index) or CPI (Consumer Price Index) or some other? Inflation may be regarded ‘high’ in terms of CPI but it is low (in fact, negative for most of the recent periods) as measured by WPI. So, whether the current inflation rate is high or not depends on how it is measured.
Also, one may raise questions about the effectiveness of tight money policy (mainly a demand-restricting measure) in controlling inflation. In other words, is the current inflation primarily a demand side or a supply side phenomenon? If it is mainly a supply or cost side issue, then a high interest policy may even aggravate the problem by making it more costly to produce in India.
Prima facie, the empirical evidence is not conclusive either way. The Indian economy is now universally accepted (despite some reservations about the exact GDP numbers, which also exist regarding the data of many other countries including China, in particular) as the fastest growing big economy in the world, in spite of the ‘high’ inflation, ‘high’ interest rate and ‘tight’ monetary policy. So, does it support or refute the Rajan stand?
For India (as also for many developing countries without old age social security), the interest rate issue gets further complicated as a large section of senior citizens depends on interest earnings from bank fixed deposits as the primary means of survival in old age. So, a reduction in interest rates, even when justified for promoting the overall growth of the economy, has the unintended consequence of worsening the economic condition of a large number of vulnerable people.
In other words, reasonable men may differ on the monetary policy stance taken by Rajan or any other RBI governor. At the same time, it must be recognised that it is not a closed and shut case and the governor has to take the final call, taking into account the various conflicting considerations. That is his mandate.
It does not make sense to blame the governor for being ‘anti-national’ or ‘pro-foreign’ for his stand. It is also not enough to say that growth should be preferred over controlling inflation. Rajan would also say the same thing, except that he believes that controlling inflation is necessary for stimulating investment and growth.
If anything, it strengthens the case for having a Monetary Policy Committee consisting of several expert members (though even here controversies would remain about how these experts are selected and who decides in case of a tie) as recommended by many, including Rajan. This would protect a single person against the sole blame (or credit) for the monetary policy pursued by the RBI while maintaining some degree of policy stability as the exit of the members (including the governor) would be staggered over time. Above all, the independence of this committee from the government needs to be ensured as otherwise, monetary policy would be dictated by the short term political exigencies of the government or hijacked by the special interests lobbying through the politicians.
It should be a sobering thought that, apart from India, monetary policy pursued in a number of countries has become much more controversial in recent times. Who could ever imagine that the policy interest rate could be negative? But that has become the case in Sweden, Denmark, Switzerland and most recently in Japan.
