It’s raining stars in the banking firmament. After RBI governor Raghuram Rajan, it’s the turn of deputy governor of the central bank, Dr Urjit Patel. The 50-year-old economist—trained at Yale and Oxford—shot into the limelight after a panel he chaired recently said the bank’s priority must be to control inflation. So far, the bank has interpreted its mandate under the RBI Act, 1935, as including economic growth, stability and inflation—all on par. The panel’s other recommendation, that the RBI governor will have one vote among equals on a new monetary policy committee (MPC), has stirred fears of a technocratic takeover of the central bank. RBI governors are appointed by the PM, and so represent Parliament at the bank. The status gives the governor tremendous power. Just last month, Rajan vetoed the MPC to enforce a rate cut.
Ajay Chhibber, who heads India’s Independent Evaluation Office, says elected representatives must have a significant role at the RBI. “Committee members should not be government officials but should be selected by some form of parliamentary approval,” he says. Last week, finance minister P. Chidambaram emphasised RBI’s mandate according to the government: “The RBI must strike a balance between price stability and growth while formulating monetary policy.”
That said, policymakers have tried for six years to control inflation. The rash of optimistic forecasts achieved little. Contradictory statements pronouncing high inflation as inevitable compounded the chaos. The notion that inflation will spiral was embedded—and it came true. India had the highest inflation among developing countries between 2006-12, the global financial meltdown never fully explaining the trend. “Nor is today’s inflation explained by rising food or fuel prices,” says Manipal University’s T.V. Mohandas Pai. Pai supports inflation targeting and RBI accountability: “Appearing more often before parliamentary committees, offering detailed accounts of why decisions are taken,” he says, ensures the RBI isn’t considered arbitrary.
“The report gives top priority to inflation. The other two objectives, growth and stability, remain,” explains Chetan Ghate, associate professor, Indian Statistical Institute, who was also on the Urjit panel. He says fears that inflation will spill into “core” sectors is real. The RBI must focus attention on the problem.
This understanding rebuts the official version that inflation is limited to some sectors, primarily food and fuel. Over the last two months, vegetable price inflation declined from 11.2 per cent to 8.8 per cent but inflation in housing, clothing and other services is stuck near 8 per cent. Economists see this as tough-to-dislodge “core” inflation taking root and spreading to health, education and other services, making everyday life tough.
The Urjit report slots the comfort zone for inflation at 4 per cent, give or take 2 per cent—much lower than the 10 per cent consumer prices now hover at. It’s a tantalising prospect, despite caveats, including a two-year time-frame. “The whole idea behind inflation targeting is to move toward a more rule-based approach in monetary policy,” says Ghate. Indeed, tackling growth, inflation and stability simultaneously is virtually impossible. As the government itself argues, inflation is often a byproduct of growth.
How far the deputy governor’s skills will take this debate is anybody’s guess. Former associates speak highly of him as an economist as also his ability to tackle Indian officialdom. In the early 2000s, Urjit helped set up the Competition Commission as India’s youngest regulator. Today, he’s the oldest. He’s worked at Boston Consulting on tax and electricity reform and in India with Reliance Industries. Sources say he was picked for a former RBI stint solely on merit (he never lobbied). In this round, he’ll have to.
@Misogynist: You are right. Congress lost because of algebra. Let me explain.
The real balance is FISCAL DEFICIT - NET IMPORT = NET PRIVATE SAVINGS.
NET IMPORT is called FOREIGN DEFICIT = CURRENT ACCOUNT DEFICIT = CAD. The difference (FISCAL DEFICIT - CAD ) feeds the economy. The sum FISCAL DEFICIT+ CAD means NOTHING. Yet the economists keep adding them ( Rajan, Chidambaram and Manmohan Singh ) which kills the economy. FISCAL DEFICIT is vital to the economy. Now you should understand why I say algebra killed the Indian economy. X%GDP DEFICIT will grow India's economy by exactly X%GDP. For example 4.6% GDP DEFICIT will grow the economy by 4.6% GDP, as everybody knows. Manmohan Singh is to be assigned the blame for letting this happen. He was sleeping during his watch.
You need to maximize (FISCAL DEFICIT- CAD) instead of minimizing (FISCAL DEFICIT + CAD). This mistake did congress in.
@Ashok Lalique: There is no such thing as wasteful govt expenditure. All govt spending enters the private sector in short order and empirically the GDP is 5 times govt spending whether or not wise.
There are two things needed to control inflation.
1. Increase interest rates, RBI function.
2. Increase money supply, that is, FISCAL DEFICITS = CREATED MONEY to revive a starved economy. Growth requires that (FISCAL DEFICIT- CURRENT ACCOUNT DEFICIT) be positive and as large as possible, say, 30% GDP. This is a govt function.
Nothing else will work.
North Block and Mint Street have sometimes faced off on rates, with the government pushing for cuts to stimulate growth. However, no one could have a greater stake in getting inflation, which has ravaged the economy like the Ebola virus for several years, back to a figure of close to four per cent than someone who has to face the electorate. The results from the recent assembly elections underline this fact. Inflation is hurting household consumption and distorting the manner in which savings are being invested, both a vital ingredient for growth to revive. The two gentlemen featured in the photograph are just what the economy needs right now.
ALL of Manmohan Singhs choices have failed to deliver in the past.
Why should they deliver now - only because of foreign degrees held by them?
We at Outlookindia.com welcome feedback and your comments, including scathing criticism
1. Scathing, passionate, even angry critiques are welcome, but please do not indulge in abuse and invective. Our Primary concern is to keep the debate civil. We urge our users to try and express their disagreements without being disagreeable. Personal attacks are not welcome. No ad hominem please.
2. Please do not post the same message again and again in the same or different threads
3. Please keep your responses confined to the subject matter of the article you are responding to. Please note that our comments section is not a general free-for-all but for feedback to articles/blogs posted on the site
4. Our endeavour is to keep these forums unmoderated and unexpurgated. But if any of the above three conditions are violated, we reserve the right to delete any comment that we deem objectionable and also to withdraw posting privileges from the abuser. Please also note that hate-speech is punishable by law and in extreme circumstances, we may be forced to take legal action by tracing the IP addresses of the poster.
5. If someone is being abusive or personal, or generally being a troll or a flame-baiter, please do not descend to their level. The best response to such posters is to ignore them and send us a message at Mail AT outlookindia DOT com with the subject header COMPLAINT
6. Please do not copy and paste copyrighted material. If you do think that an article elsewhere has relevance to the point you wish to make, please only quote what is considered fair-use and provide a link to the article under question.
7. There is no particular outlookindia.com line on any subject. The views expressed in our opinion section are those of the author concerned and not that of all of outlookindia.com or all its authors.
8. Please also note that you are solely responsible for the comments posted by you on the site. The comments could be deleted or edited entirely at our discretion if we find them objectionable. However, the mere fact of their existence on our site does not mean that we necessarily approve of their contents. In short, the onus of responsibility for the comments remains solely with the authors thereof. Outlookindia.com or any of its group publications, may, however, retains the right to publish any of these comments, with or without editing, in any medium whatsoever. It is therefore in your own interest to be careful before posting.
9.Outlookindia.com is not responsible in any manner whatsoever for how any search engine -- such as Google, Bing etc -- caches or displays these comments. Please note that you are solely responsible for posting these comments and it is a privilege being granted to our registered users which can be withdrawn in case of abuse. To reiterate:
a. Comments once posted can only be deleted at the discretion of outlookindia.com
b. The comments reflect the views of the authors and not of outlookindia.com
c. outlookindia.com is not responsible in any manner whatsoever for the way search engines cache or display these comments
d. Please therefore take due caution before you post any comments as your words could potentially be used against you
10. We have an online thread for our comments policy:
You are welcome to post your suggestions here or in case you have a specific issue, to directly email us at Mail AT outlookindia DOT com with the subject header COMPLAINT