A day after former Reserve Bank of India (RBI) Governor Y V Reddy said that the role of the central bank is under threat, another former Governor Bimal Jalan on Tuesday said the RBI’s autonomy is fundamental and needs to be maintained. “…the autonomy of the RBI — that is a very fundamental fact and we have to maintain it and I hope the government would give attention to that part also,” Jalan said in an interview to CNBC TV18.
Jalan said one would have to wait and see how the relationship between the government and RBI develops which ultimately is a matter of coordination. “…it is a matter of consultative approach and it is too early to be able to say how it will grow in … autonomy of the RBI and autonomy is not what you call independence,” he said.
Jalan’s comments come a day after Reddy said the role of the RBI in the economy is under threat and institutional identity of the central bank has been damaged due to demonetisation. “I would even go to the extent of saying that particularly recent events, I have seen the comments from economists, from Standard and Poor’s and they are disturbing. For the RBI, for a central bank, reputational risk is the worst risk. Credibility is the worst risk. And if this is happening in the international opinion, I would say that it is a national problem now and it is not just a political issue,” Reddy said.
Jalan was the RBI Governor from 1997 to 2003 and was succeeded by Reddy. “RBI is a part of the economic system and there is always consultative process between the RBI and the government, but it is a process and when you talk about monetary policy – the autonomy of the RBI is that you can take very hard decisions,” Jalan said.
When asked whether he would have advised the government to take such a big step, Jalan said: “It is a decision and whether a decision is right or wrong that can only be proved over a period of time. If the black money reduces, if the corruption reduces, certainly it is a worthwhile step although it has pained the not so well-of classes more.” He said that if the demonetisation decision leads to further administrative reforms, it would be a major gain.
Jalan said economic growth rate would decline due to demonetisation. “It is very difficult to go through the percentage points…but everybody agrees that there would be a decline in the rate of growth. How far it is due to demonetisation and how far it is the trend from 7.6 to 7.1, you have seen last year itself…Let us wait and see that is the best thing rather than forecasting at the moment,” Jalan said.
India’s GDP growth is seen decelerating to 7.1 per cent in 2016-17 (April-March) from 7.6 per cent last year, primarily due to slowdown in manufacturing, mining and construction sectors, the first advance estimates released by the Central Statistics Office (CSO) showed last week. The worst affected sectors included manufacturing and mining sectors, with the gross value added (GVA) growth for manufacturing sector expected at 7.4 per cent, down from 9.3 per cent growth seen a year ago. The advance estimates of GDP for 2016-17 are based on sectoral data for the first seven months of this financial year (April-October) and do not reflect the impact of the government’s November 8 decision to scrap high-denomination currency notes of Rs 500 and Rs 1,000 on economic growth.