The tam­ing of a cen­tral bank

The Pak Banker - - OPINION - V. Anan­tha Nageswaran

In­dia's fac­tor mar­kets are bro­ken. Land ac­qui­si­tion is next to im­pos­si­ble. Labour mar­ket re­forms are threat­ened by a coali­tion of in­ter­na­tional agen­cies and mol­ly­cod­dled labour unions. Banks have dud as­sets on their books and their nodal min­istry ap­pears to be wak­ing up to their prob­lem af­ter about 14 months in of­fice. Eco­nomic growth num­bers are still not con­vinc­ing. In this mi­lieu, some of­fi­cials in the fi­nance min­istry de­cided it will serve na­tional in­ter­est best to put up the re­vised draft In­dian Fi­nan­cial Code on the web­site for com­ments.

Com­men­ta­tors and media did not have time to plough through the code. But, they cot­toned on to the fact that a sec­tion of it seeks to rein in the pow­ers of the gover­nor of the Re­serve Bank of In­dia (RBI) with re­spect to the con­duct of mon­e­tary pol­icy. That was enough for them to paint the fi­nance min­istry in one cor­ner and RBI in another.

More pre­cisely, it was painted as a bat­tle be­tween the fi­nance min­is­ter and the in­cum­bent RBI gover­nor. Some com­men­ta­tors took one look at it, thought for a sec­ond about which side of the fence they were on and took sides on that ba­sis. There was a fo­cus on the short-term, sen­sa­tion­al­ism, per­son­al­i­ties over prin- ciples and wrong fram­ing of is­sues. It was the quin­tes­sen­tial In­dian ap­proach to prob­lem solv­ing.

Laws gov­ern­ing the con­duct of macro-eco­nomic pol­icy and the fi­nan­cial sec­tor will be with the coun­try well be­yond the present gov- ern­ment and the present RBI gover­nor. Fram­ing the is­sue as one of a bat­tle be­tween the fi­nance min­is­ter and the RBI gover­nor is my­opia.

It was the United Pro­gres­sive Al­liance (UPA) gov­ern­ment that ap­pointed the Fi­nan­cial Sec­tor Leg­isla­tive Re­forms Com­mis­sion (FSLRC) in 2011 and that com­mis­sion came up with the code. It is not an ini­tia­tive of this gov­ern­ment. This gov­ern­ment had good rea­sons to aban­don the work of the com­mis­sion and start afresh. But, as with many other things, it has de­cided to carry for­ward the worst pol­icy lega­cies of the pre­vi­ous gov­ern­ment.

The real pur­pose of the code ap­pears to be as much about un­leash­ing the fi­nan­cial sec­tor-global and In­dian-on the un­sus­pect­ing In­dian public as it is about con­strain­ing the cen­tral bank from stop­ping that process. How­ever, even if the au­thors of the code have taken on the mis­sion of tam­ing RBI, the min­istry should re­al­ize that there are more ur­gent and im­por­tant pri­or­i­ties.

In­deed, a non-trans­par­ent and rel­a­tively opaque cen­tral bank ap­pears to be ideally suited to pre­vent the emer­gence of the fi­nan­cial sec­tor that drives the real econ­omy than the other way around. In­dia did not have the prob­lem of an over­ar­ch­ing fi­nan­cial sec­tor in 2008 be­cause, as Joe No­cera put it in a New York Times ar­ti­cle in De­cem­ber 2008, "the Re­serve Bank of In­dia had a bank reg­u­la­tor who was the anti-Greenspan and that his name was Y.V. Reddy".

Greenspan, the apos­tle of fi­nan­cial de-reg­u­la­tion, ad­mit­ted that he had found a fa­tal flaw in his model. He elab­o­rated fur­ther on his con­fes­sion in a con­ver­sa­tion with jour­nal­ist Gil­lian Tett of the Fi­nan­cial Times at the Coun­cil on For­eign Re­la­tions in Oc­to­ber 2014. He said that non­fi­nan­cial sec­tors were well be­haved and that an­i­mal spir­its run wild in the fi­nan­cial sec­tor. In ef­fect, he ad­mit­ted it could not be left to its own de­vices. Of course, the em­pir­i­cal proof was the cri­sis of 2008. Given free­dom to choose their own lever­age (cap­i­tal) ra­tios, fi­nan­cial in­sti­tu­tions did not man­age their risk and made the sys­tem risky and un­sta­ble.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.