VIRAL ACHARYA, former Deputy Governor of the Reserve Bank of India, who quit in July 2019, six months before his term was scheduled to end, said on Tuesday that central bankers who worked “tactfully” with the government in the last decade did not produce better outcomes.
His exit, and that of Raghuram Rajan, Urjit Patel and Arvind Subramanian, should be seen as a “form of dissent” which helps in strengthening the institutional framework and protecting the RBI’s autonomy, Acharya said in an Idea Exchange online interaction with The Indian Express.
“We should not interpret exits as a problem. In my view, we should interpret exits as a form of voice, as a form of dissent that the system requires to have the right public debates and get to the right path… In my view, the government and the bureaucracy are stuck in the old mode of functioning even though the Indian economy is no longer the nationalised era economy. They are regressing… they need to embrace a more market-based economy…,” he said. Acharya’s book “Quest for Restoring Financial Stability in India” based on the speeches he gave during his tenure as RBI Deputy Governor and released in July has kicked off a debate and discussion on many issues including RBI autonomy and fiscal dominance.
Responding to a question on whether the RBI’s communication with the government could have been better and those at the helm could have built allies in the government system, he said, “…to everyone who says we do not know how to work tactfully, we do not know how to communicate, we did not build allies, we did not bring everyone on board, my question is when things were being done in that manner, do you have evidence to show me that the next 10 years of India’s growth have been great?”
He said he was “fundamentally questioning this thesis”. “…hen the central bank toed the line, and the way to do was to strike backdoor compromises, the way to move forward was to agree to relaxations, recognising that there were political short term pressures, in my view, we are paying the cost of that right now,” he said.
According to Acharya, the conflict between the government and the RBI arose because of the former’s push for opening liquidity and credit taps to boost short term growth, disregarding longer term goals of a stable financial system. “Why are we not able to take the necessary expenditures and transfers that perhaps need to be made to households in the midst of Covid, is because we have not had an open debate about the fiscal situation of the country. A number gets announced as the real deficit and everyone is happy… everyone in the system says oh how can we question the real official statistics of the government. But when they are not right, they are not right. I want to fundamentally disagree with the thesis that those who agree have been able to pave a better outcome for the country,” he said.
Acharya left the RBI on July 23 2019, six months before his term was scheduled to end, while Urjit Patel had quit as the RBI Governor on December 10, 2018, almost 10 months ahead of his term. Rajan announced in June 2016 — about three months before his term was — that he will not be the RBI Governor after September 4, 2016.
Patel and Acharya both resigned to stall attempts by the government to weaken the central bank, water down some of its prudential regulations on stability of the financial system, and rules governing surplus transfer to the government.
Acharya, presently the C.V. Starr Professor of Economics in the Department of Finance at New York University Stern School of Business, said tensions between the government and the central bank arise because the former focuses on short term goals whereas the RBI’s approach is long term.
“There are times when political horizons for decision making can become very very short term, and this excessive focus on short term growth numbers can sort of completely capture the minds of the authorities because that’s their single minded focus, that we have to generate high growth in the short run because then we can say that India is growing at 8%, 9%, 10%. And that can create pressure to keep monetary policy accommodative, open up liquidity taps and do a credit fuelled stimulus,” he said
Over the last decade, this short term approach has gone “spectacularly bad”, as seen in the case of discoms debt which have not been meaningfully resolved over the last decade, he said.
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