Reserve Bank of India Governor Raghuram Rajan answered questions from The Hindu’s Puja Mehra in Washington on India’s economy, comparisons with China, the central bank’s differences with the government and the biggest regulatory shake-up in its 80-year-old history.
Reserve Bank of India Governor Raghuram Rajan on Wednesday said there were some issues over which the Modi government and the central bank were “trying to persuade one another” but on many others the two sides are on the same page.
Dr. Rajan seemed to suggest the proposed Public Debt Management Authority (PDMA) could be an issue on which they differed.
The PDMA is supposed to take over from the RBI the task of managing the Centre’s borrowings.
Concerns about a central bank also being the public debt management authority though not entirely unwarranted were perhaps overblown, the Governor said in an exclusive interview with The Hindu.
“If you look across countries there have been concerns that a central bank being the public debt management authority may be lacking in some of its functions… In my many years at watching the RBI, I haven’t seen it change monetary policy because it is not worried about anything other than inflation,” said Dr. Rajan.
Perception of conflicts
If there was a perception of conflicts in the RBI then there was some rationale to having an independent agency to take over.
He, however, cautioned that conflicts were on both sides as the government also owns public sector banks and the LIC.
The same conflict that existed in the RBI shouldn’t be transferred to the proposed entity which might end up having closer links with the government, he explained.
Excerpts from the interview:
The RBI cut key policy rates in January and March but banks didn’t follow up with lending rates cuts. You did some tough talking on April 7 morning and by evening banks had started announcing lending rate cuts…
Who knows why the banks cut rates…I think they have been saying that they find it difficult to cut rates in the tight money period in March and that they will carry it out in April, so my guess is that they had enough information at that point to decide to cut rates. I myself doubt it was tough talking from the RBI.
The IMF’s projections of India overtaking China’s growth have led to excitement and optimism. Can India become an engine of growth as China?
Let me temper expectations and optimism a little bit. China is four times India’s GDP. As countries get richer, their growth slows and of course, differences in statistics across countries etc, but let’s say that’s right, I think, it’s more a reflection of how strongly China has grown over the years that we have found it difficult to overtake them in the past and are only now doing it. Because we are so much poorer than them, we should be growing faster and so it speaks a lot for China’s policies. That said, we should see this as the beginning of a journey that hopefully will extend for a long time. That we will not just grow at current rates but we will expand or extend our growth rates and eliminate the kind of impediments we have to growth all the while ensuring that we take macro policies that make the growth sustainable. The worse thing in the world is to grow at tremendous rates for a short time and then find that you have run out of steam. Government has taken measures to start creating the platform for strong, steady, sustainable growth and certainly we at the RBI are trying to help.
In the policy statement on April 7, you raised some red flags on the economy, including an expectation of growth getting revised downwards. How good is India’s growth?
I think it is picking up from a pretty low level for us that was reached in 2012-13, 2013-14. Am hopeful it strengthens over time. Our worries about the numbers — the 7.5 per cent for 2014-15 — was that it required a lot of growth in the fourth quarter; we didn’t see the high-frequency numbers substantiate that. That would bring down the estimated growth for 2014-15 a little but broadly speaking the economy is seeing the early signs of a recovery. Not still strong but slowly picking up. The IIP numbers, for instance, were good so…all adds to a picture where we see some pick-up in investments, not huge but some pick-up, some reduction in stalled projects.
You follow CPI [Consumer Price Index], but is the record low of - 2.3 per cent WPI [Wholesale Price Index] good or bad news?
I think we would see WPI as also closely linked to international prices, and international prices have been flirting with zero especially when you add energy prices. It would be good news for inflation if over time it seeps into our CPI inflation.
The RBI committee’s precondition for making the shift to Inflation Targeting is that Government pares its fiscal deficit as a ratio to GDP down to 3 per cent by 2016-17. You signed an agreement with the Government on a Monetary Policy Framework for targeting to reach a given level of inflation while the Government in its Budget proposed postponing the fiscal deficit target by a year. Is the inflation target then achievable?
I think there is a level of fiscal irresponsibility beyond which a central bank cannot really do its job. Few people would say that India is anywhere near that situation. You can quibble about whether it is next year or the year after but the reality is that once we have signed an agreement to watch for inflation and we have been set by the Government the duty of managing inflation within certain bounds, we have to deliver on it and we can’t look for excuses. In fact, if the Government runs a larger fiscal deficit we have to do more on the monetary side to contain inflation.
More than half of inflation is food prices on which influence of Monetary Policy is limited…
If there is something horrendous that knocks out, let’s say for the sake of discussion, a significant part of agricultural production, food prices go through the sky. A central bank tasked with getting inflation under control will not try and restore the price level that existed before the food shock. That’s a misconception a lot of people have. Instead, you will say I am not going to try and contain inflation this year to or 5 or whatever my target is because given that food prices are 50 per cent higher; there is no way I can do it. Instead I am going to try and bring inflation back within the 5 per cent range over the span of the next two years. In other words, what you are doing is accommodating the supply shock and saying you can’t reverse that, that’s supply demand, but what you can do is prevent that supply shock from feeding into second and third round effects. That is, people shouldn’t now start saying okay food is now so much costlier, my wages are going to be so much higher then because wages are higher other output goods get higher and you get into a spiral. That’s what we can try and curtail.
What are the pros and cons of having a Government nominee on a Monetary Policy Committee tasked with Inflation Targeting?
That’s a hypothetical question, I can’t answer that.
It’s a theoretical question.
It’s a theoretical question but am not sure I want to get into that now.
When you and the Finance Minister say you are talking continuously and candidly, amongst other things, on proposed amendments to the RBI Act, does it mean the two sides are on the same page on all issues?
On many issues, we are on the same page. On some issues, we are trying to persuade one another. But dialogue keeps going on. And, some of the things we are talking about aren’t on your radar screen. And some of the things you think that are on our radar screen aren’t. Just as an example we are not talking about the Monetary Policy Committee composition right now. That’s not the front thing on our radar screen…
I knew you’ll ask that question but you know for example this afternoon we had a discussion about who’s going to go in these meetings [IMF and G20 meetings in Washington] and how India thought about the quota issues [for greater voting rights for India at the IMF] and so on. There are lots of issues to be discussed, which are not controversial where we work together.
The RBI is giving up management of Government’s debt. What are the risks of having a Public Debt Management Authority that is not fully independent of Government?
If you look across countries there have been concerns that a central bank being the public debt management authority may be lacks in some of its functions. It may regulate in order to have hold over Government debt or it may manage Monetary Policy in a way to reduce the cost of Government debt. I have always believed those concerns [are] not entirely unwarranted but perhaps overblown. For example, in my many years at watching the RBI I haven’t seen it change monetary policy because it is worried about anything other than inflation. But lets say these conflicts...perception of these conflicts exists then may be there is some rationale to having an independent agency. But if that agency is too close to the Government also we should be careful that Government owns a number of entities in the economy today.
Public Sector Entities, Public Sector Banks, LIC etc so that same conflict that existed in the RBI shouldn’t be transferred to an entity that now has closer links with the Government. So ideally, if you want to get all the benefits of a public debt management agency, you want to get an independent public debt management agency, which really is not powerful enough to force debt in to any body’s hands. (laughs) So, an entity, which is purely professional, not a huge bureaucracy but which manages and designs the placement of Government debt, which it is in many other countries. Conflicts are on both sides.
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