It was reassuring to see Prime Minister Narendra Modi and Finance Minister Arun Jaitley send out a message on Thursday at a function to mark 80 years of the central bank that the government and the monetary policy authority are on the same wavelength on critical economic issues. This is important especially after recent reports of a conflict between the finance ministry and the RBI over the government’s decision to divest the central bank of functions such as public debt management and oversight of the government securities market.
The positive signalling is significant at a time when growth is an overriding objective and the need for a coordinated approach on fiscal and monetary policies all the more important. It also helps that both the government and the RBI appear to be on the same page when it comes to the goal of ensuring the delivery of financial services to every household in the country over the next few decades, given the potentially huge multiplier effect it could have on the economy.
India’s central bank’s track record has been very good, which both the PM and FM acknowledged, especially since other institutions in the financial sector have been post-liberalisation creations. The RBI governor pointed out that strong national institutions are hard to build, which makes it critical to nurture existing ones and constantly rejuvenate them from within. Today, that is one of the biggest challenges in the country, also because the state has systematically weakened such institutions and, in some cases, virtually reduced them to subordinate offices of the Central government. But as the economy scales up and India moves up the pecking order in terms of the size of GDP and other metrics, what will count for both overseas and local investors is the strength and record of institutions which can provide reassurance and lend credibility on the policy front.
The strength of such legacy institutions — be it in India or elsewhere — has much to do with professional competence, integrity and the quality of leadership over a sustained period of time. That is what the government should bear in mind as it gets down to the job of building new institutions.