Kr­ish­na­murthy Subra­ma­nian, in his own words

Mint ST - - NEWS -

The in­com­ing CEA has writ­ten on a host of sub­jects rang­ing from RBI to agri­cul­tural in­come tax as a Mint columnist. A look at his views on key is­sues:

In­fla­tion tar­get­ing by cen­tral banks across the world rests pri­mar­ily on two key pil­lars: ac­count­abil­ity and trans­parency. Given the im­por­tance of cen­tral bank com­mu­ni­ca­tion in bring­ing about trans­parency, an im­por­tant ques­tion that arises is: How much at­ten­tion should cen­tral bankers pay to fi­nan­cial mar­kets?

Pru­dent cen­tral bankers would pro­fess that fol­low­ing the mar­kets... would pro­duce poor pol­icy for sev­eral rea­sons...

If the cen­tral bank strives hard to please mar­kets, it is likely to mimic the short hori­zon of mar­ket par­tic­i­pants and thereby be­come my­opic in its de­ci­sion mak­ing. This can cre­ate a dan­ger­ous phe­nom­e­non of the dog chas­ing its tail for­ever, wherein the mar­ket re­acts, or pos­si­bly over­re­acts, to per­cep­tions about what the cen­tral bank might do, and the cen­tral bank looks to the mar­ket for guid­ance about what it should do.

The broader point is that cen­tral banks are pro­vided in­de­pen­dence by the coun­try’s leg­is­la­ture—the Re­serve Bank of In­dia Act, 1934, in the In­dian sce­nario—be­cause cen­tral bank­ing pol­icy, by its very na­ture, re­quires a long hori­zon on the one hand, and the abil­ity to take un­pop­u­lar de­ci­sions on the other...

There­fore, when ex­am­in­ing how far cen­tral bankers should fol­low fi­nan­cial mar­kets, we should keep in mind this broader point about the need for the cen­tral bank to re­main im­mune from short-term pres­sures and pop­ulism. (bit.ly/2swln6v)

...Should mon­e­tary pol­icy be guided by the goal of long-term growth and price sta­bil­ity or yield to short-term pres­sures to man­age in­ter­est rates? Said dif­fer­ently, with re­spect to mon­e­tary pol­icy, which of the fol­low­ing two op­tions is bet­ter: in­sist­ing that our mon­e­tary pol­i­cy­mak­ers stick to clear rules or grant­ing pol­i­cy­mak­ers broad dis­cre­tion?

Of course, fis­cal and mon­e­tary poli­cies al­ways in­volve some com­bi­na­tion of rules and dis­cre­tion. Pol­i­cy­mak­ers never sim­ply em­ploy one ap­proach or an­other by it­self. But they do, at dif­fer­ent times and in re­sponse to dif­fer­ent pres­sures, tend to em­pha­size one over the other. When pol­i­cy­mak­ers lean in the di­rec­tion of rules, they pur­sue less in­ter­ven­tion­ist, more pre­dictable, and more sys­tem­atic poli­cies. In mon­e­tary pol­icy, rules-based pol­i­cy­mak­ing cor­re­sponds to ad­her­ing to a steady and pre­dictable strat­egy for ad­just­ing in­ter­est rates or the money sup­ply. (bit.ly/2swccdf) from two sec­tions of the pop­u­la­tion: (i) peo­ple from the top half of the coun­try’s in­come dis­tri­bu­tion, i.e. the richer folks, who want to ex­change their hon­estly earned sav­ings for new cur­rency; and (ii) peo­ple who are act­ing as agents for the dis­hon­est... (bit.ly/2qmba4t)

Rat­ing agen­cies (CRAS) in In­dia gen­er­ate sig­nif­i­cant revenue through non-rat­ing ac­tiv­i­ties un­der­taken by their spe­cial­ized sub­sidiaries. On av­er­age, about 40% of the to­tal revenue of the rat­ing agency stems from non-rat­ing ac­tiv­i­ties... Given the per­ni­cious role of CRAS in the fi­nan­cial cri­sis of 2008-09, the Se­cu­ri­ties and Ex­change Board of In­dia (Sebi) should take note and ap­pro­pri­ately reg­u­late the CRAS to elim­i­nate these con­flicts of in­ter­est...

De­spite main­tain­ing a Chi­nese wall be­tween ad­vi­sory ser­vices and rat­ing ser­vices, rat­ing and non-rat­ing en­ti­ties have com­mon own­er­ship and top man­age­ment...

CRAS main­tain that while non-rat­ing ser­vices do pose con­flict of in­ter­est chal­lenges, rev­enues from other ser­vices re­duce de­pen­dence on rat­ing ser­vice rev­enues and thereby en­able them to main­tain ob­jec­tiv­ity and in­de­pen­dence. How­ever, the ev­i­dence does not sup­port their claim of ob­jec­tiv­ity and in­de­pen­dence.

Sebi should there­fore take strong note of the wor­ry­ing ev­i­dence in this study and ap­pro­pri­ately reg­u­late the CRAS to elim­i­nate these con­flicts of in­ter­est. Over­look­ing this is­sue may sow the seeds for an In­dian ver­sion of the de­struc­tive role that CRAS played in the fi­nan­cial cri­sis of 2008-09. (bit.ly/2rhrg5y)

On Teacher’s Day, In­di­ans and young In­di­ans in par­tic­u­lar would do well to seek in­spi­ra­tion from for­mer Re­serve Bank of In­dia (RBI) gover­nor—he demit­ted his of­fice on Sun­day—and my teacher Raghu­ram Ra­jan. Ra­jan in­spires as a teacher for both his pro­fes­sional and per­sonal qual­i­ties.

As some­one who has gained re­spect all over the world for his thought lead­er­ship, Ra­jan is worth em­u­lat­ing as a pro­fes­sional...

A teacher is some­one who teaches not only through his ideas but also through ex­am­ples. I have been priv­i­leged to learn from his ideas and by observing him even be­fore he was a celebrity. Now, a lot of us have had the op­por­tu­nity to ob­serve him in pub­lic of­fice. We would do well to learn from the teacher who hap­pened to be the RBI gover­nor. (bit.ly/2l2rzal) elicit in­for­ma­tion about the bor­row­ers. Thus, only those bor­row­ers who are “con­nected” to the loan of­fi­cers ob­tain op­ti­mal credit.

A more sus­tain­able ap­proach to fi­nan­cial in­clu­sion in­volves en­abling peo­ple to bor­row from the for­mal sys­tem. We ar­gue that tax­ing agri­cul­tural in­come can im­prove ac­cess to fi­nance to a large sec­tion of farm­ers be­cause ver­i­fied in­come tax re­turns can pro­vide a cred­i­ble sig­nal of the earn­ings po­ten­tial of a farmer.

Thus, rather than lis­ten­ing to the pow­er­ful lobby of rich farm­ers, the gov­ern­ment should seize the op­por­tu­nity to ben­e­fit the small farm­ers by tax­ing agri­cul­tural in­come at min­i­mal rates of about 5%. (bit.ly/2qhf6wj)

While po­lit­i­cal free­dom has been given a lot of im­por­tance in In­dia, eco­nomic free­dom does not make head­lines. Eco­nomic free­dom is of­ten dis­missed as an elit­ist con­cept ben­e­fit­ing only big busi­ness at the ex­pense of labour. In fact, many states in In­dia that adopt a busi­ness-friendly ap­proach are of­ten dis­missed as sup­port­ers of crony cap­i­tal­ists. Not sur­pris­ingly, In­dia ranks a low 111th on the world eco­nomic free­dom in­dex pub­lished by the Cato In­sti­tute.

In this con­text, we ex­am­ine a re­port, Eco­nomic Free­dom in States of In­dia... and re­late the av­er­age eco­nomic free­dom in­dex score of a state (based on the last four re­ports) to the growth in the num­ber of SMES in the state...

...Four of the top five states in terms of eco­nomic free­dom also oc­cupy four of the top five ranks in terms of growth of SMES. (bit.ly/2bwusvg)

Some be­lieve that PSBS are un­nec­es­sar­ily be­ing made to look like vil­lains by com­par­ing them with pri­vate sec­tor banks. The ar­gu­ment be­ing that from the pe­riod 1997 to 2009, PSBS per­formed very well when com­pared to pri­vate sec­tor banks. In this con­text, we should note that if pri­vate sec­tor banks are used for com­par­ing favourably the per­for­mance of PSBS dur­ing the pe­riod 1997 to 2009, it is then ap­pro­pri­ate to use the same pri­vate sec­tor banks for un­favourable com­par­isons now as well.

How­ever, we must rec­og­nize that gov­er­nance is­sues are pa­pered over dur­ing good times. There­fore, it is dan­ger­ous to use the rel­a­tive good per­for­mance of PSBS dur­ing 1997 to 2009 to ad­vo­cate that struc­tural re­form is not nec­es­sary.

(bit.ly/2qkshzg)

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