Policymakers, students of public policy should stop thinking in silos: YV Reddy

Our Bureau Bangalore | Updated on August 21, 2014 Published on August 21, 2014

Plea to appreciate the value of coordination in public policy

Stability to Indian financial sector is provided not by banks or government but by citizens, said YV Reddy, Chairman of the 14th Finance Commission, and former RBI Governor, here on Thursday.

He was speaking at the ‘Policy Speaks’ series of IIM-Bangalore on ‘Linkages in Public Policy in India’.

People’s role

Policymakers and students of public policy should stop thinking in silos, he said.

“When there is a crisis in public sector banks, the government bails them out and vice versa. In times of stress, how can two weak wings of the same system support each other?” he asked.

“When both government sector and financial sector are highly leveraged, then it is a problem. However, I credit the people of India for a stable economy as, fortunately, the household sector here is low leveraged. The stability to Indian financial sector is therefore provided not by banks or by government but by the people of India,” said Reddy.

He cited several examples to explain the need for policymakers and students of public policy in the country to understand, coordinate, harmonise, optimise and appreciate linkages in the system.

Value of coordination

“Every participating agency must appreciate the value of coordination in public policy. The weakness of one policy must be offset by action taken in another policy area. For instance, if the fiscal policy is loose, then the monetary policy may have to be tightened in order to avoid the weakness of the fiscal policy from getting into the totality of the system,” he explained.

Exhorting students of public policy to appreciate linkages between policies, he cited the example of the relationship between the RBI and the Central government.

RBI profit

“The central bank has made a profit of ₹53,000 crore this year, which is almost 0.5 per cent of GDP – which is more than double of all the dividends given to Government of India by all undertakings – oil, banks, insurance etc. Is that good news? Well, when the Central Bank is having high profits, it means the fiscal policy is very weak! The profit of the Central Bank is usually a reflection of the fiscal profligacy. That’s the link,” he observed.

“Any profit or loss that the RBI makes in the open market, the government has to pick up as it gets reflected in the balance sheet. It’s the same when it comes to interest rates. Any interest rate that RBI tries to influence in turn influences the interest rate of government securities. That’s the link,” he added.

He asked the audience whether they were aware that the debt to GDP ratio in India had come down in the last few years.

“How did this happen? Well, public debt burden is reduced by taxation, financial repression or inflation. In the last five years, there is a large burden due to inflation on people but the debt burden on Government of India got a huge relief,” he said.

Complex reality

“The central bank is considered as ‘lender of the last resort’, but when RBI takes such a risk, it is the government which must take the hit. You cannot be a ‘lender of the last resort’ without the blessings of the Finance Minister. This is an example of the linkages I am talking about,” Reddy said, urging students of public policy to use theory to understand concepts but to engage with reality to understand and appreciate complexity.

Rajalaxmi Kamath, Chairperson, Post Graduate Programme in Public Policy and Management (PGPPM), said ‘Policy Speaks’ series had begun on a strong note with a speaker of the stature of Reddy.

Published on August 21, 2014
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