Politicisation Of The RBI Board Not In The Best Interest Of India, Says Arvind Subramanian
Arvind Subramanian said the politicisation of the Reserve Bank of India’s board is not in the best interest of the country.
The autonomy of the central bank must be protected, said the former chief economic adviser to the Modi government. But the technicals should be open to review, he said speaking on Friday at an event to launch his latest book ‘Of Counsel: The Challenges of the Modi-Jaitley Economy’.
His comments come days ahead of the second meeting of the RBI’s board after a public feud between the central bank and the government over surplus reserves and strict bad loan recognition timelines.
Subramanian reiterated his support for transferring “excess capital” lying with the RBI. But said it ought to be done only to recapitalise public sector banks, conditional to governance reforms in these lenders. “Any such a transfer shouldn’t be used towards financing the deficit and it should only be taken with the RBI’s approval.”
At the book launch Subramanian, who returned to academia after quitting the Finance Ministry, discussed a whole host of topics with billionaire banker Uday Kotak and Sajjid Chinoy, chief India economist at JPMorgan.
Here are some more talking points from the event:
From Office To Academia
Subramanian, who quit office in June 2018 citing personal reasons, said it was “tough” transitioning back to academic life. "I was up 24 hours and I was sleeping very little for much of the period here,” he said.
The 90,000-Crore Elephant In The Room
In retrospect, Subramanian felt that the asset quality review by the central bank in 2015 aided in the tackling of non-performing assets. He advocated a similar treatment for the crisis in the non-baking sector to bring in more transparency.
A Rs 90,000 crore elephant comes out of the blue and nobody knows about it?
The Demonetisation Aftermath
The turning point for the Indian financial sector -- for its significant growth and the change in perspective -- has been the demonetisation event, according to Kotak.
The savings surge that started with demonetisation led to the entry of more non-bank lenders. “The joke in town was that if you wanted to triple your money, open an NBFC with Rs 100 crore and you become owners of Rs 300 crore overnight.”
The Corporate Tax Rate Debate
Responding to Kotak's "courageous" prescription of lowering corporate tax rate to 18 percent, Subramanian said such a move would be “justifiably politically difficult”, given that this is an era stigmatised capitalism.
He suggested instead the tax cuts must be in conjunction with increased public spending. “This is in view of recent corporate scandals and high-income inequality.”
Farmer Distress: Where Is India Going Wrong?
The farmer's protests despite the guarantee of a minimum selling price assurance by the government point to a change in the agricultural economy beyond our understanding, according to Subramanian. He said the MSPs outside of cereals are not that effective.
Kotak said the issue with low food inflation and high food prices is related to the state’s capacity to execute. “If you have an MSP, we must be able to walk the talk. That is a big gap in the system.”
Advice To The Modi Government
The head of the country’s second-largest private sector bank has a word of advice to the government for the coming 12-18 months: “Keep the price of oil low, don’t get complacent and focus on growth.” Kotak also suggests that the focus must be on the correlation between interest rates and real factor costs and understanding how those play out.
Subramanian said that hedging may not be the solution to India's oil price woes. “The bigger question is what should our policy be in the energy sector?”
‘Whatever It Takes’
Subramanian believes that the central bank's policies must be subject to review. The RBI should have taken "the Draghi route" and be "more imaginative", he said alluding to the European Central Bank’s chief's "whatever it takes" mantra.