Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 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

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Too lax an approach to fighting inflation
May 30, 2014

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.


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

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Is Your Bank Gambling With Your Money? These Banks Should be Declared Dangerous... (Profit Hunter)

Jul 17, 2018

Tanushree Banerjee bets you would not want to leave your money with these unsafe banks...

Your Rescue Plan from the Cave of Poor Quality Stocks (The 5 Minute Wrapup)

Jul 17, 2018

And there will be no getting trapped with Amtek, Vakrangee, or Manpasand like stocks.

2019 Lok Sabha Elections and the Perils of Populism (Vivek Kaul's Diary)

Jul 17, 2018

Evidence from around the world shows that populism can only lead to more populism and this is clearly not good news for the Indian economy.

More Views on News

Most Popular

The Real Truth About India's FDI, Beyond WhatsApp(Vivek Kaul's Diary)

Jul 4, 2018

The FDI numbers do not look very impressive once we adjust for repatriations as well as the overall growth in the economy.

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 17, 2018 03:37 PM