Let’s democratise monetary policymaking

The RBI has once again held its signal interest rates, much against what most would have liked. And the country is supposed to presume that it is wise enough to do the right thing for the economy all the time.

There’s an irony here. Elected representatives such as the Prime Minister in India or President in the US who are vested with the responsibility to deliver employment and growth, and control prices face so many constraints — constitution, parliament, aggressive opposition and ex-post scrutiny by the CAG, PAC, CBI, etc. But there no such fetters for the unelected monetary monarchs — be it the head of the US Fed or the RBI.

This is even as their moves can puncture the actions or ambitions of millions. Monetary and macro economics are not precise sciences like physics and chemistry — they are based on loose aggregates. The world over, most economies have reduced the role of fiscal policies and selective credit controls.

What is administered instead is general purpose monetary policy like controlling money supply or its cost (interest rates).

However well read or respected the monetary heads are, they are not exactly beyond basic human frailties. Consensual opinions are easy to reverse or alter in relation to those of an individual; individual egos may not come in the way. When there are so many shades of opinion going around and the individual initiates some action, (and most actions are the result of some bias, as George Soros reasons) there is a human tendency to defend such actions. Such individuals become slaves to their earlier opinions.

The more prolonged the resistance, the more the economy pays, like the Greenspan’s exuberant expansion causing a worldwide meltdown. It is risky and costly to leave the nation’s fate to the orientations of any single person.

Some pockets of absolute freedom and discretion like election commissions and courts (so long as they don’t keep dictating laws in the guise of judgments) are inevitable. But where the effect is far reaching and the expectation of various stakeholders different, the best way is to reconcile these and push for a balanced action.

The governors can be nominated and elected by a collegium comprising bank chiefs, select credit or economic research institutions, pensioners or retail depositors chosen at random, some political representatives, select state level representatives, and those from finance ministry and industry associations.

Or the chosen (however) may be made a member of parliament (Rajya Sabha) and asked to justify their actions before the houses. In the least, the policies should be a consensus of a committee which should include representatives of various affected groups and stakeholders.

The world over monetary management and politics are running on parallel tracks if not at loggerheads. These need to be synchronised so that monetary stubbornness does not frustrate political consensus which is closer to the people, at least in democracies.

Inflation and interest rates share a reflexive relationship rather than inflation being slavish or subservient to interest rates as most actions (or arguments) of monetarists would have us believe.

The government and monetary agencies need to agree on target ‘real interest rates’ which may be done by balancing the priorities of pensioners, debtors, current savers and government priorities. For example it may be feasible to target a real interest rate of 3 per cent within a band of plus/minus 1 per cent over every year (to avoid frequent adjustments).

Now, inflation/deflation hits first and then monetary heads control it without limits on how long and how much. This is too risky a system, with scope for excesses.

In India, where the level of monetisation is low and the monetary authority’s writ does not run throughout the economy, monetary actions leave an excessive impact on those sectors within its control. So, it may be necessary to view inflation in the light of the proportion of credit enjoyed by each sector from the banking system. There is also a serious need to reinvent selective credit controls which could focus attention on trouble spots alone.

Another friction point is the exchange rates. A currency which does not adjust properly to the inflation differential is bound to impact growth and jobs. Political and monetary authorities must agree on levels of adjustments.

The hallmark of a democracy is participation. The current communication style of RBI is not impressive at all — it seems to indulge in stonewalling. This is odd for an institution vested with so much responsibility and faith.

The writer is the author of ‘Making Growth Happen in India’ (Sage India)

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