India's economic growth is at a crucial stage. The government has been criticized for not doing enough to boost growth. Important bills are still stuck in Parliament. Labour reforms have not seen the light of day. Large infra projects have still not been revived. PSU banks are almost in a moribund condition. Is it any wonder that private investment has not picked up?
In such an environment, investors have every right to expect the government to display a degree of urgency and clarity. Instead, all they have experienced so far is disappointment. The government has failed to live up to expectations. What we are now beginning to witness is perhaps something sinister. Instead of taking responsibility of the mess in the economy, the government seems to be trying to interfere with independent institutions, an example being the Reserve bank of India (RBI).
The recent Indian Financial Code (IFC) draft proposes a government majority on the panel that will set interest rates. The IFC also proposes to take away RBI governor's veto power. We believe this is a clear cut case of the government trying to meddle with the independence of the RBI. The issue as we see it seems to be the RBI's desire to go slow with interest rates cuts. There have been many voices from within the government that have been clamoring for more rate cuts. One can understand corporate India's blind and foolish lust for rate cuts. However, the same should not be the case with the government.
As per an article in the Economic Times, the rating agency Moody's is the latest to severely criticise this move. The government has been forced to clarify that these are only proposals and the final policy will take time to formulate. Understandably the RBI is expected to turn down the proposals. Trying to take control of monetary policy is something that we strongly disapprove of. Whatever the differences between the RBI and the Ministry of Finance may be, we believe formulating monetary policy is a highly technical activity which demands specialised skill sets. It is best left to the competent and experienced individuals in the RBI.
There is no doubt that the RBI has been an excellent regulator. It is among the few public institutions India that maintains its independence, integrity and competence. The best way that the government can ensure the RBI continues to do what it does best, is to leave it alone.