The announcement of Urjit Patel as the next governor of the Reserve Bank of India (RBI) would seem to indicate continuity in the broad stance of monetary policy that was pursued under his immediate predecessor, Raghuram Rajan. From all accounts, Patel had been closely linked with the earlier governor in terms of the broad policy approaches of the RBI throughout the past three years.
In all fairness, one must accept that of all the names that were considered at the last stage, Patel’s was possibly the most appropriate, seen from all angles. He has impeccable academic credentials for the job. As far back as 1994, Patel had co-authored an insightful paper titled ‘Debt, Deficits and Inflation: An Application to Public Finances of India’, along with Willem H Buiter, a well known monetary economist who is currently chief economist at Citigroup.
The paper was written when the real values of the public debt and the debt-to-GDP ratio in India was rising sharply. Buiter and Patel had carried out a fairly elaborate econometric exercise to examine whether the pattern of debt and deficits that was prevalent then was sustainable. The concern particularly was on the monetisation of persistent deficits and thus to their potential inflationary consequences.
More or less the same intellectual concern would seem to have informed the RBI Committee on Monetary Policy Reforms, which Patel chaired recently. This Committee has taken a strong position on inflation targeting and recommended that a six-member Monetary Policy Committee be set up with three members each from the government and the RBI to determine the calibration of the interest rate. The RBI governor would chair this committee and would have the casting vote in the event of a tie.
In one of his countless homilies, John Maynard Keynes had said that “if economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”. Of all the available candidates, this was certainly the “dentist” with the most apt credentials.
Having said the above it would be important to examine whether the idea of focusing solely on inflation targeting and fixing the interest rate is all that a mature central bank governor should address. The answer must be in the negative.
The ultimate aim of monetary policy must be to ensure steady growth of income with as near full employment as is possible. Looked at in this light, monetary policy must be looked upon as a tool, albeit a powerful one, rather than an end in itself. It is this Chicago school-type fundamentalist Milton Friedman-like position that makes the views of some of the present-day acolytes suspect.
Eight years after the subprime crisis convulsed the economies of the US and Western Europe, it is clear that it is the monetarist-free-market-oriented climate prevailing since the Reagan-Thatcher years that led inexorably to the housing bubble and finally to the mini Wall Street crash of 2008. It again required the visible hand of the government, very much in the Keynesian mould, via substantial expenditure stimulus, to lift their economies back on the rails. But in the groves of Western academia, the debate rages on, and there are many ‘fresh water’ economists who still argue that the crisis came about not because of the deregulation but because the deregulation was not carried out farther enough.
If at all there is some basis for debate between the two camps in the US and Western Europe, there is none whatsoever in the context of developing countries like India. The scope for monetary policy has to be much wider, and it ultimately has to address the wider development concerns, encapsulated pithily in the imperative to maintain the highest level of employment and to sustain income growth. In the Indian context one has to make doubly sure that income growth comes about especially in the bottom rungs of income. This would have two important implications.
This would, first of all, go a long way towards reducing poverty. And secondly, and quite importantly, this would help reverse the sharpening of inequalities, which has been one of the disturbing features of our growth experience in the post-reform years. But this would have yet another macroeconomic significance. It is only a more egalitarian income distribution that would maintain the level of aggregate demand that will keep the circular flow of income going on an even keel.
One major issue is crying out for immediate resolution. In the past year the non-performing assets (NPAs) of 39 listed banks have risen a whopping 96%, from Rs 3.2 lakh crore to Rs 6.3 lakh crore. There are no prizes for guessing who the principal defaulters are: they in fact constitute the who’s who of top Indian business houses. Most of them happen to be the major financiers of the top political parties, including the party in government. Who is going to go tough on them? And how does one do it when some of them operate from abroad?
The Indian business mind is possibly the most fertile, and our academic economists have a long way to go before they can even get to fathom some of the most original subterfuges that our business and commercial class is capable of. Thus one must say that there are substantial challenges for the 24th governor of India’s central bank. There is no doubting his basic training in the fundamentals of macroeconomics. One would sincerely hope that in addition to his zeal for keeping inflation on a low keel, he brings a humane touch to addressing the larger issues of poverty and inequality, which regrettably continue to define the Indian economy and society.
Pulin B Nayak is a former professor of economics at the Delhi School of Economics
The views expressed are personal