I did see an interview given by Arvind Subramanian, Chief Economic Advisor to the Indian government, to ‘Business Standard’ last week on how the government would begin the process of providing structured inputs to the Monetary Policy Committee (MPC) of the Reserve Bank of India. Three officials from the Department of Economic Affairs – the Chief Economic Advisor, the Principal Economic Advisor and the Secretary to the Department – would meet with the Monetary Policy Committee members.
That was an interesting proposal. My eyebrows went up but I did not blog on it because last week was too busy.
What was not clear from that interview was the structure of the meeting. For example, would these officials travel to Mumbai and meet with the MPC as a group? Would they invite them to Delhi? Would they meet them in separate groups? RBI members and external members (government nominated) separately?
MINT has an Edit on it this morning. It provides some information on the above questions:
The Union finance ministry has summoned the members of the monetary policy committee (MPC) to New Delhi to discuss government views on interest rate policy. The meeting will be attended by chief economic adviser Arvind Subramanian, principal economic adviser Sanjeev Sanyal and economic affairs secretary Shaktikanta Das. There will be two sessions: one with RBI representatives in the MPC and then one with the outside members, a curious arrangement.
That does not make for good optics.
The Edit argued against the idea and said that the notion of independence had to be preserved. It went on to make a forthright suggestion in the end:
The “structured” meetings with finance ministry officials is, similarly, an idea that needs to be junked.
Government providing inputs to central banks is always controversial although the central bankers (not in India) doing the bidding of the private sector does not attract as much criticism as the government provision of inputs does. This is not a criticism against MINT or about the state of affairs in India but a comment in passing, to suggest that the so-called independence of the central banks has been more of a textbook concept or a concept for Editorial writers, around the world.
If Government pressure happened in any case, isn’t it better that it happened in the open?
If the meetings that are now proposed were junked, would the pressure not be happening?
Isn’t it a bit like black markets in drugs? Drugs are bad. But, given that they are sold anyway, would you want them be sold in the open or behind railway stations in the sidings?
I think this is better than secret communication and expression of government preferences in the media before monetary policy meetings.
The amendments to the Reserve Bank of India Act for the purpose of the constitution of the MPC provide for the Government to share its views, when deemed necessary, in writing:
(9) The Central Government may, if it considers necessary, convey its views in writing to the Monetary Policy Committee from time to time. (Section 45ZI, RBI Act 1934, p. 90 as amended up to June 27, 2016 uploaded by RBI in November 2016)
So, what I would tell the government?
(1) I would not want it to be junked. But, the legislation had not envisaged a structured input provision process. So, the government is deviating from the legislation. It has to acknowledge that.
(2) The meetings can alternate between Delhi and Mumbai as a routine – one here and one there. That would take away the bad optics of ‘being summoned to the Durbar’ in Delhi.
(3) The meetings should be with the full MPC and not in groups.
(4) The legislation calls for the input to be provided in writing and not orally. Hence, these meetings should be Minuted and shared with the public along with the Minutes of the MPC Meeting.
If I am not mistaken, this is how it is done in Japan. They do not summon MPC members to the Office of the Treasury but Treasury officials attend the MPC meetings and voices the views of the government.
That would aid public discourse as to why Government wants lower (or higher rates?!) and what are the arguments it puts forward for it.
That is good for policy discourse, good for the institutional mechanism and even hugely educative for students of economics.
Indeed, it would bury the constant bickering between MoF and RBI on interest rates and it would set a very healthy precedent on how to manage the political economy of turf battles between different arms of policymaking.
(5) Once this process is instituted, no one else in the government – the Minister of Finance, his Deputies, the Minister for Commerce, FinMin bureaucrats and the DEA officials too – should have any public comments on monetary policy and interest rates, etc. There should be a very strict gag order like the one on the red beacons now. For example, this should not be permitted.
The government has an opportunity to convert this into a model institutional arrangement and thus set a healthy precedent for similar such interactions between various arms of the government.
More than the ban on the red beacon, it would be a substantive achievement for the Prime Minister if he were to issue guidelines to MoF as suggested above.
To be fair to governments around the world and not just in India, if central banks maintain a tight monetary policy, the government can also claim that it is hurting its fiscal goals since the cost of capital is high with a tight monetary policy. It is particularly so in India since the government has a fiscal deficit target to meet.
It is fair game for the government then to offer its inputs to the central bank just as the central bank wants the government to maintain a prudent fiscal policy since a lax fiscal policy can undermine the central bank’s inflation mandate.
So, therefore, shouldn’t the Reserve Bank of India also shut up and not talk in public about the need for fiscal prudence ahead of the budget? Instead, it can opt for a private and formal consultation with the Ministry of Finance.