X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Too lax an approach to fighting inflation - Outside View by S.S. TARAPORE
 
 
Too lax an approach to fighting inflation

Monetary authorities have got to focus on inflation, and inflation alone. There is no scope for loose ends here

There is broad consensus that inflation in recent years has been way beyond acceptable levels and effective control of inflation is top priority for the new government.

In this context the autonomy of the Reserve Bank of India's monetary policy function and its accountability comes to the forefront.

There have been two reports recently, namely the report of the Financial Sector Legislative Reforms Commission (FSLRC) March 2013 and the report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework, January 2014 - the Patel Committee. There is some merit in fusing the recommendations of the two reports.

The FSLRC's thrust

According to the FSLRC, the predominant and secondary objectives of monetary policy should be set out by the Government in a public statement. The predominant objective could be stipulated in terms of an inflation rate or any other objective such as the exchange rate or the nominal GDP. The RBI should then have instrument independence.

The decisions taken by the RBI should be through a monetary policy committee ( MPC) consisting of the governor and one other executive member of the RBI and five external members appointed by the Government, with consultation with the RBI on two external members. Furthermore, a representative of the Government would attend the meetings of the MPC and have the right to be heard but he/she would not be entitled to vote. The Governor would have the right to veto the majority view in exceptional circumstances but would have to justify the action in a public statement.

The FSLRC proposal has certain drawbacks. While the RBI would be accountable for its actions, the majority of the members of the MPC would be non-executives. This goes against the fundamental principles of executive responsibility and accountability.

Again, one is all too familiar with how executives and external advisers can be overawed by the presence of a top Finance Ministry official - the Big Brother's watching syndrome!

Patel Committee's suggestions

The Patel Committee recommends a nominal anchor, that is an inflation rate target based on the Consumer Price Index (CPI) of 4 per cent with a band of +/- 2 per cent around it.

Given that at the time the report was submitted the CPI inflation rate was 10 per cent, the committee recommended a glide path of 24 months to reach the desired target. The Patel Committee recommendation may appear to be a narrow objective compared with the FSLRC, but it provides a clear focus on the problem of inflation which has become an overriding priority.

According to the Patel Committee there would be a five-member MPC consisting of three executives (governor, the deputy governor and executive director) and two external members appointed by the RBI. In the MPC as envisaged by the Patel Committee accountability would obviously be with the RBI.

A matter of concern is that the Patel Committee envisages that the external members would be full-time; this gives rise to a piquant situation regarding the pecking order of the executive members vis-a-vis the external members. The Korean experience with full-time external members did create serious problems in the day-to-day operation of monetary policy; therefore, full-time external members would not be desirable.

The impact of inflation on vulnerable segments of society requires to be addressed in the next few weeks to bring about a significant and enduring reduction in inflation.

A pragmatic approach

Legislative changes in the financial system would take months, even years, and the fundamental overhaul envisaged by the FSLRC had best be undertaken after detailed discussion and a consensus between the Government, policymakers, regulators, market players and opinion-makers. Such legislative changes should not be rushed through without following proper parliamentary processes. Hurrying through fundamental financial legislative changes is clearly not desirable.

Hence, a pragmatic approach would be to immediately implement, without legislative changes, some vital measures.

The Government, in consultation with the RBI, should set out in the public domain the predominant objective of monetary policy in quantifiable monitorable terms for, say a two-year period. This should be placed before Parliament. There should be an annual presentation by the RBI to the parliamentary committee on finance. Given the broad consensus that inflation control requires immediate action, it is obvious that the predominant objective in the immediate ensuing period should be inflation control.

The present technical advisory committee on monetary policy could be revamped into a five-member MPC with three executive members and two part-time external members who would be provided facilities to access information but they would not be given any executive functions.

The central task of monetary policy would be to ensure that sector-specific inflation, such as food inflation, does not degenerate into generalised inflation. The Government in turn should undertake suitable measures, such as open-market sales of foodgrains and imports of other scarce items. The Government should also intervene where cartelisation is evident in certain food items.

The central objective should be to bring about a decisive reduction in the inflation rate in the current financial year and there should be no question of easing monetary policy until inflation is totally squelched. This would alleviate the suffering of the masses and generate a climate of confidence which would boost savings and investments.

The writer is a Mumbai-based economist

Please Note: This article was first published in The Hindu Business Line on May 30, 2014.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

Equitymaster requests your view! Post a comment on "Too lax an approach to fighting inflation". Click here!

  
 

More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

How To Read Your Mutual Fund Account Statement Correctly (Outside View)

Aug 17, 2017

PersonalFN simplifies the mutual fund account statement for you.

This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

Aug 17, 2017

A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

Aug 17, 2017

Mr Trump is in the White House and the gods are in their heavens; what's not to like?

Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

Aug 16, 2017

All across the country, the old gods become devils. New, gluten-free gods take their places...

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Aug 17, 2017 (Close)

MARKET STATS