Opinion Holding RBI accountable

It is true that the world has slowed down this year. But India has not slowed down,it has collapsed. Just think about it — collapsed worse than the Lehman debacle. Elsewhere in the developing world,GDP growth has declined by a maximum of 1-2 percentage points. Our seasonally adjusted annualised growth has declined to little over 2 per cent from a level of 10 per cent in the first three months of 2011.

All in the name of killing inflation,especially food inflation. No other central bank uses the WPI to measure inflation. No other central bank uses interest rates to address supply side issues. No other central bank thinks that raising interest rates will affect food production. And no other central bank thinks that raising interest rates will affect the probability of a drought. This is why accountability is needed.

Let us look at what has been happening to food inflation in the year that the RBI went on a growth-killing spree. Primary goods,which constitute 20 per cent of the WPI basket,has a year-on-year inflation rate for the calendar year 2011 of only 3.2 per cent. WPI for food (which constitutes almost half the CPI basket and 15 per cent of WPI,is registering a year-on-year inflation rate of only 1.3 per cent. (These figures are as of December 3 ,2011,and assume no further fall or increase in the index for the remaining weeks of December. It is likely that there will be a further fall,and the inflation rate will come down further.) Fuel and power,again for 2011 till the first week of December,is running at an annual rate of 15 per cent. Add these two items,primary goods and fuel,and for a third of the WPI basket,inflation for 12 months for these non-core items is running at a less than a 4 per cent rate.

But what about core inflation,defined as inflation of non-food manufactured goods? The table documents various statistics pertaining to both inflation and real activity. The RBI favours rear window policy indicators like year-on-year inflation,etc. Also reported are the same statistics for the last six months. As far as core inflation is concerned,there is a surprising regularity observed — year-on-year core inflation has been in a very narrow range of 1 percentage point around the average of 7.4 per cent. Six-month core inflation has shown a reasonably steady decline from about 9 per cent in February 2011 to about 5 per cent in the last three months. And with food and primary goods inflation declining fast,core inflation is likely to fall below 5 per cent on a sustained basis in the very near future. This trend will be reinforced by the fall in international commodity prices; food inflation worldwide is registering zero growth for the last 12 months,and a reasonably steep decline since the peak in February-March 2011.

The dates of the RBI’s policy action are reported in the first column. The next column documents the advice on repo rate action given by the RBI’s own Technical Advisory Committee (TAC). This committee was set up some years ago to advise on the RBI’s policy; it is parallel to similar bodies in the UK and elsewhere. The deliberations,and recommended action,are reported on its website a few days after the RBI’s action. This is part of a transparency mechanism set up by D. Subbarao,for which he is to be congratulated. However,members of the TAC must be wondering why the body is not only not listened to,the RBI seems to go out of its way in going against the recommendations of this six-member committee. For the entire calendar year 2011,the committee has recommended that the RBI raise rates by a total of 45 basis points. They have repeatedly warned against the trigger-happy actions of the RBI,have warned that supply side inflation was not best tackled by raising repo rates. To no avail — the RBI has raised rates by a total far exceeding the recommendations — 225 basis points.

Thus,accountability at the RBI is needed because of the lack of any explanation,coherent or otherwise,of its actions. At the outset,let me state that there are sufficient rumours about the possibility that the RBI is being dictated to by the Delhi combine of Manmohan Singh and his chief (and it appears,only,) economic adviser,C. Rangarajan. If this is the case,then substitute lack of coherence of RBI’s actions to lack of coherence of Manmohan Singh-C. Rangarajan’s actions. But the point of accountability still remains,because Manmohan Singh,and/or his party,are accountable to the people of India and can be made to answer for their actions — by being voted out. Parenthetically,it is likely that the same combine,by implementing similarly questionable policies 1994 onwards,were in some part responsible for the Congress gaining only 145 seats in 1996.

But the RBI governor cannot be,and should not be,subject to the same rules as the politicians. So how can he be held accountable? By requiring the governor to make a presentation to Parliament twice a year,as is the practice in the US.

The writer is chairman of Oxus Investments,an emerging market advisory firm