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‘Autonomy comes with responsibility’

Richa Mishra | Updated on November 14, 2018 Published on November 14, 2018

Former RBI Governor Bimal Jalan shares his views on central bank autonomy, inflation targeting, NPAs, and more

A banker should object to the term ‘bad bank’ as there is nothing called ‘bad bank’, says Bimal Jalan, former Governor of Reserve Bank of India, adding that it is for the regulator to ensure that such situations do not arise. In December 2000, delivering the 11th CD Deshmukh Memorial Lecture, Jalan, the then Governor had said: “There seems to be a growing consensus now — in theory as well as practice — that the central bank should have instrumental independence, and concentrate on a single target of inflation control with the use of a single instrument. The position, no doubt, is theoretically sound, but as I look at the history of economic thought and changing fashions in economic policy-making, I must confess to a sense of some discomfort on whether the current dominant view on ‘one target, one instrument’ will survive the test of time.” It seems like Jalan was predicting what was going to happen in 2018. In fact, Jalan had gone on to say, “Ultimately, governments and central banks have to respond to the primary concern of the people, and the principal economic problem facing their countries during particular periods of time.”

BusinessLine caught up with Jalan, who has donned many hats — RBI Governor from 1997-2003, nominated member of Rajya Sabha from 2003-2009, Finance Secretary, besides others — and is currently heading the panel to select the next Chief Economic Adviser in the Finance Ministry.

“There is a difference between autonomy and accountability, and everyone is accountable to someone,” said Jalan, adding that he did not favour a singular pursuit of ‘inflation targeting’. Excerpts:

Till recently not much was known about Section 7 of the RBI Act, but today it is much debated. What is the purpose of this Section? Under what circumstances can it be used? Should such a proviso exist?

There is no confusion about the Section. It is an old Section which is still relevant. The intent always is that the government and RBI work together. But, if necessary, the government can under Section 7 give certain instructions to the RBI.

Since the Section does not elaborate upon the circumstances under which it can be used, therefore, I cannot comment on that. Besides, it is the first time it is proposed to be used. On whether such a provision should exist, there is no harm in having it. The application of this Section is a decision taken by the government in unusual circumstances. So far it has not been introduced. However, if there is a security issue or an issue concerning the larger economic framework, in the country’s interest, the government can enforce this.

A term most used today is ‘autonomy’ or ‘autonomous institution’. Do you think it is being misused?

No. First you have to interpret what autonomy means. In the country, the media is autonomous, but the media also has to respond to public interest. Who will decide the public interest, media or Parliament? Why I am asking this is because we need to understand what autonomy is, when we talk about it. Yes, there is autonomy, but media, or anyone for that matter, are autonomous in normal circumstances when there is no strategic or structural problem in the country. Now, take the case of RBI. It can take its own decisions on interest rates, inflation control versus growth, etc — of course, in consultation with the government — in normal circumstances. But, just as is the case with media, when it abuses a private party they can take you to court. Similarly here, the RBI and the government can also take a call.

So, autonomy comes with its own responsibility in a country. What I am saying is that within a country the ultimate authority is with Parliament as the legislator, government is the executive, and then the justice system — the final authority to give a judgment. Constitutionally, this is how it is in our country. There has not been any debate on this, and this doesn’t disturb the autonomy of the Parliament, Judiciary or the Executive. Accountability is different from autonomy.

Do you see a liquidity crisis in the banking system?

I would not call it liquidity crisis. Yes, there is a liquidity problem. When the credit demand is higher and the deposits are not happening like they should — then you have the repo system. There is a relationship between the RBI and banks, and when there is an issue the RBI provides credit to the banks through the repo system.

While I don’t want to comment on whether the RBI has erred in currency management or not, I can say there are always options available and the person who is on the seat takes his/her own decision. You can say it in public, I can’t because I have been involved with the RBI.

There are a lot of debates on inflation targeting. What are your views on it?

The government and the RBI have given their views. Personally speaking, I did not favour targeting per se. Even in the old days, there used to be lot of discussions, and we were asked to target the inflation, but we had said ‘No’. This despite our (economic/banking) situation not being as good as today; everybody then had agreed to do what is good for the country.

In targeting, supposing there is drought (and the RBI has targeted an inflation rate) and money has to be disbursed.

Before the drought supposing we had set the rate of inflation at 5.9 per cent, and after the drought, because of the measures that need to be taken, the inflation rate becomes 6.1 per cent. What happens to the target then? All of us want low inflation, but we don’t need to target it.

But given the resources the central bank has, their inflation targeting has been questioned…

That is essentially the point which it has to figure out. But everybody wants inflation per se to be under control. And there can be no two views on that. We want to reconcile inflation with growth prospects, but it depends on the kind of situation we have. Broadly speaking, we want to have low inflation and the RBI can decide from year to year what should be taken into account — state of global economy, exports, imports, etc.

What I am saying is we need to manage inflation, but we don’t need a target per se. We want low inflation, but how you define ‘low’ can be left to the circumstances.

How important is the price of crude oil in the entire fiscal math …

There is no doubt that it is very important. We are a large importer of oil and rising prices affects the opportunities we have for maintaining inflation, exchange rate, trade deficit, etc.

At the moment we are in a position to handle all this. We have the reserves, we have the resources. We are more comfortable in managing it today than in the 1990s.

Although we have deregulated petroleum products — namely, petrol and diesel — we are maintaining prices by controlling our imports. And if the situation demands we can change the energy mix.

Given the current account deficit (CAD) situation how to you view our external account?

I think we are in a strong position, but we have to figure out why the CAD is like this. Our exports are not expanding as fast as it can, and the global economy is also not helping. The global economy is also going through certain amount of uncertainty. We just have to wait and watch.

How do you see the issue of non-performing assets (NPAs)? Has the government got into action too late? There is a perception that the PCA is too stringent do you agree?

Yes, it’s a big problem. The RBI has already introduced prompt corrective action (PCA), which will hopefully help. But we need to wait for six to eight months.

Yes, we are late in the sense that once it was known that the NPAs are increasing beyond the comfortable level we should have taken action — that is, when NPAs went up by more than a couple of percentage points.

There has been delay. There is no doubt that the NPAs are higher, much higher, than what is called normal and that our intervention system has been initiated recently. We have to ask why the PCA came now.

If you had taken action two years ago, the PCA should not have been this stringent. We learn by doing.

Do you think merging banks is the right approach?

In today’s technological age and situation where there are too many public sector banks — catering to urban, semi-urban and rural areas — the Finance Ministry is right when it says that we have to do whatever has to be done using technology.

You can have lesser numbers of banks with vast outreach and using technology. Technological change has allowed rural areas to make transactions through mobile phones, so we can have lesser number of banks with vast outreach.

Published on November 14, 2018
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