Give accountability a chance 

Give accountability a chance 

Context

Author cites his views regarding bringing in accountability for RBI

What is to be done?

Author points out that the central bank is going against all known models of central bank policy. Therefore the question arises, in the immortal words of Lenin, “What is to be done”?

Author’s proposal

Author makes the following proposal, which as per him will preserve independence of the central bank and make the RBI more accountable

• Change the RBI Act, if need be, to require the RBI governor (as lead representative of the MPC), to testify to Parliament twice a year
• In separate testimony in both houses of Parliament, the lawmakers can ask questions of the RBI governor and the governor can respond

Cherry-picking of data by RBI

Author mentions that RBI may have cherry-picked data to suit its conclusion that the government policy on loan waivers will have a large impact on the consolidated state plus centre fiscal deficits. This expansion of fiscal deficit of 1 per cent of GDP due to loan waivers (RBI estimate) will, the RBI concludes, lead to a large 0.5 per cent increase in CPI inflation

• At present we are in the wilderness about (i) the actual magnitude of loan waivers this fiscal year; and (ii) more importantly, the impact it would have on CPI inflation, the principal concern of MPC policy

Relevant question

What is the empirical evidence for the argument that an expansion of fiscal deficits leads to an increase in CPI inflation?

Ignoring data

The table shows three-year averages of the — fiscal deficit and CPI inflation

• Looking at the period 1996 to 2004 (the data omitted by the RBI, and omitting the onion outlier year of inflation in 1998), annual inflation declined from around 6.6 per cent to 4 per cent. The fiscal deficit expanded from 8 per cent to 9.4 per cent of GDP. If the RBI had included the data from 1996 to 2005, as I show in my note, they would have found that there is no relationship between fiscal deficits and inflation for the long time-period 1996 to 2016
• Now let us look at the data considered by the RBI on fiscal deficits and inflation, 2006 to 2016. During this time-period, there is a sharp increase in inflation — from around 6.5 per cent to 9.9 per cent (year ending 2013), and then a sharp decline to 4.5 per cent in 2016. The trajectory of the absolute value of the fiscal deficit in the same period follows that of inflation — from 5.7 per cent to 8.3 per cent, and then a sharp decline to 6.6 per cent in 2016

Accountability is the way to go

Ignoring the 1996 to 2006 data is the clearest, and obvious, form of cherry-picking the data, an intellectual “crime” that the RBI seems to have willingly committed. Such actions will be rendered impossible if India were to introduce the policy of accountability

Finance Act

Author states that it is worthwhile to quote from our own Finance Act of 2016, the one that established the MPC: “And whereas the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth. The Central Government may, if it considers necessary, convey its views in writing to the Monetary Policy Committee from time to time.”

Author has mentioned Humphrey Hawkins testimony in the article. Let us see what it is.

Humphrey Hawkins Testimony

It is an old name given to a biannual event in which the Chairman of the US Federal Reserve Bank makes a report to the US Congress on the state of the US economy and monetary policy twice a year.

• This testimony session is named after the lawmakers (Sen. Hubert Humphrey and Rep. Augustus Hawkins) who sponsored the Full Employment and Balanced Growth Act of 1978, the law which made this testimony compulsory
• This testimony is televised. Author wants something on the same lines in India