Disclaimer – this blog is written by Mr. Sanjiv Shankaran.
An essay in Mint by R. Jagannathan has used the controversy over Arvind Subramanian’s working paper on GDP estimates to offer suggestions on the Monetary Policy Committee (MPC).
The essence of his argument is best captured by the following sentences.
“Clearly, the MPC must either be disbanded or given a new mandate that includes some responsibility for growth as well. As currently constituted, the MPC is a huge waste of time and effort.”
These sentences encapsulate popular misconceptions about the MPC’s mandate. It is surprising that these misconceptions continue because the current RBI governor Shaktikanta Das has often tried to clarify the mandate.
The most recent effort was on 17th June during the course of a speech. This is what he said on the mandate.
“This role of the Reserve Bank has been restated as per the amendment in the RBI Act in May 2016 according to which “the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth”. Therefore it has been our endeavour in the Reserve Bank to ensure price stability under the flexible inflation targeting regime and simultaneously focus on growth when inflation is under control.”
The legislative change for flexible inflation targetting was introduced in 2016. However, the transition to a de facto inflation targetting regime began in 2014, even before Narendra Modi became prime minister and when inflation was close to double digits.
Jagannathan suggests that there be an explicit quantitative mandate for economic growth. That is, a percentage like the one given for inflation.
It is an impractical suggestion.
RBI’s tools are primarily interest rates and liquidity. With these tools, it can, at best, influence the rate of inflation. To a lesser extent it can influence short-term economic growth.
If RBI’s tools are enough to handle everything, the finance minister and prime minister would have a rather diminished role in economic policy. Fiscal policy would be largely irrelevant if RBI could do all jobs on its own.
If manipulating a central bank’s policy rate has such a dramatic effect on long-term economic activity, economic management will be a trivial task.
In today’s world, monetary policy is data-based. If the underlying data is unreliable, how can a central bank or the fiscal authority be blamed? Everyone is just shooting in the dark, including columnists.
Finally, it is difficult to believe that people have forgotten that even when the RBI governor had sole authority over interest rates, there was often friction between monetary authority and fiscal authority, particularly on interest rates.
To blame only the MPC for a slowdown in economic momentum is plain wrong.