A major change looms in govt-RBI equation

October 4 will be awaited with huge interest as it’s D-day for the Reserve Bank of India, when for the first time the monetary policy rate to be announced will be decided by a six-member monetary policy committee comprising both government and RBI representatives. The government on Thursday finalised its three names. The RBI had finalised its names much earlier. RBI governor Urjit Patel will have the casting vote if there is a tie. Hitherto the governor was all powerful and could ignore the recommendations of the five-member technical advisory committee, that used to meet before the policy announcement and provided inputs on interest rates to the governor.

Interestingly, among the government’s three names of leading economists is that of Chetan Ghate, professor at the Indian Statistical Institute, who was also on the TAC, so it will be interesting to see how he uses his new-found clout.

The MPC will be the much-needed bridge between the government and the RBI, which had almost always been at loggerheads over the policy rate. Their objectives were different, with the government focused on growth and the RBI on keeping inflation down, and therefore decided on policy rates in a way that would enable it to meet its objective. There was a time when the spat between the two — between then finance minister P. Chidambaram and then RBI governor D. Subbarao — got so vehement that Mr Chidambaram said in October 2012: “Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone.”

The MPC was created with this contentious background that had been in existence for a few years, and it will be extremely interesting to see if the constitution of the MPC will resolve this conundrum of growth versus inflation. There are many who say that inflation and growth should not be seen as opposite sides of a coin, and that they should co-exist. Erstwhile RBI governor Raghuram Rajan had always maintained that inflation hurt the poor the most as they would have to pay higher prices for essential items like shelter, food, medicare/health and education. These issues, such as on shelter, are within the purview of the government and to the extent it is unable to control it or provide cheaper alternatives to economically weaker sections, it is its failure. On the other hand, if there is no growth there can be no employment opportunities that could provide people with purchasing power.

The creation of the MPC will hopefully tackle this growth versus inflation issue, and create a win-win situation for all. It should certainly make the government much more responsive to its responsibilities to the weaker sections of society. Or so one can hope!