Note ban was draconian, monetary shock: ExCEA
POLICY ADVICE He also bats for the RBI giving part of its excess capital to PSBs NEW DELHI:
Former chief economic adviser Arvind Subramanian in a forthcoming book has called demonetization a “massive, draconian, monetary shock” and hinted he was not consulted on the matter.
Subramanian also bats for the Reserve Bank of India (RBI) deploying part of its excess capital of ₹4.5–7 trillion in recapitalizing public sector banks (PSBs) under agreed principles with the finance ministry.
Titled Of Counsel: The Challenges of the Modi-Jaitley Economy, the book deals mostly with policy decisions and their impact during Subramanian’s tenure of less than four years at the North Block.
Subramanian does not say in as many words that he was not consulted on demonetization but drops enough hints—such as his analysis being based on “publicly known facts” and that he watched the “dramatic” nationally televised speech of Prime Minister Narendra Modi on November 8 “in my room in North Block” when 86% of the currency in circulation was invalidated.
“The Indian initiative was, to put it mildly, unique. It presupposed an extraordinary amount of resilience in the economy, especially amongst the vulnerable, because it was going to be the first of two major shocks—along with the goods and services tax (GST)—to affect those in the cash intensive, informal sectors of the economy,” Subramanian said.
On why demonetization was popular politically even if it imposed economic costs, Subramanian concludes that in some cases, at least where there are charismatic leaders, policy actions that adversely affect more people are more likely to succeed than actions whose impact is confined to a narrow few. “Apparently, they find it difficult to take on, say, PSB unions, entrenched bureaucrats, or rich farmers, but less difficult to take on the entire informal sector,” he added.
Reacting to Subramanian’s revelations, Congress president Rahul Gandhi wondered why he did not resign when he disagreed so much on demonetization. The Congress party tweeted: “Obviously criticizing a decision by the Supreme Leader while in govt. would’ve been completely outside the realm of possibility.”
Joining the current debate between the RBI and the finance ministry over fixing the economic capital framework of the former, Subramanian said the RBI needs to be held accountable on the “swelling size” of its capital base.
“It holds about 28% in capital, which is the fifth largest amongst all major central banks. Two of the four above India in this ranking are oil exporters, which are special cases because these countries are highly vulnerable to the swings in the price of petroleum,” he wrote.
Arguing that the RBI has set for itself a risk tolerance that is “ultra, ultra conservative, almost bordering on paranoia”, Subramanian said whereas other central banks want to cushion against events with 1% probability of occurring, the RBI wants to cushion against events that can occur with .001% probability.
On the RBI’s objection that redeploying excess capital amounts to the government raiding the central bank, Subramanian seeks to strike a balance arguing that this capital should not be used for routine financing of the government’s fiscal deficit and should be done only after extensive consultation.
“A clear rule, enshrined in law and agreed upon by the central bank and government, could stipulate that the government will never allow the central bank capital to fall below a jointly agreed threshold. That way, the benefits of excess capital can be reaped without compromising the integrity of the central bank’s balance sheet and without undermining its policy effectiveness,” he added.
The BSE Sensex pared initial gains Friday to end modestly higher at 36,194.30 points on profit-booking by investors amid mixed global cues.
Trading sentiment was mixed ahead of the two-day G20 summit in Argentina and expectation of oil production cut in the upcoming Opec meet, analysts said.
The 30-share Sensex settled 23.89 points, or 0.07%, higher at 36,194.30, while the broader NSE Nifty jumped 18.05 points, or 0.17%, to 10,876.75.
During the week, the Sensex gained 1,213.28 points, or 2.34%, while the Nifty rose 350 points, or 3.32%.
Yes Bank, Wipro, Kotak Bank, M&M, Sun Pharma, Maruti, HDFC, Hero MotoCorp, Infosys, TCS, L&T, Bajaj Auto and HUL were among the top gainers, rising up to 6%.
On the other hand, Tata Motors, ICICI Bank, IndusInd Bank, Vedanta, NTPC, Bharti Airtel, Coal India, Adani Ports, Tata Steel, Axis Bank, PowerGrid and SBI were among the top losers, falling up to 3%.
Sector-wise, realty, pharma and IT indices rose up to 2%, while banking and metal stocks fell up to 0.55%.
Investors also turned cautious ahead of the gross domestic product (GDP) data scheduled to be released later in the day, traders said.
“The Indian equity market has hit a two-month high, 10-year bond yields are approaching 7.60% levels, and the currency is under ₹70 per US dollar,” said Sunil Sharma, chief investment officer, Sanctum Wealth Management.
Initiative was unique. It presupposed an extraordinary amount of resilience in the economy, especially amongst the vulnerable
Reserve Bank of India holds about 28% in capital, which is the fifth largest amongst all major central banks
ARVIND SUBRAMANIAN, former chief economic advisor to Modi govt MUMBAI: