GS Paper: GS3

Context

The Lok Sabha has approved a Bill to amend the Chartered Accountants Act, 1949, the law that governs the Institute of Chartered Accountants of India (ICAI).

What are the changes proposed in the Bill?

• Introduced in the Lok Sabha on December 17, 2021, and titled the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021.
• The key changes it proposes are in the area of discipline and governance and administration.
• 1] Discipline: The ICAI’s disciplinary committee and board of discipline will be chaired by non-chartered accountants (CA),
• Its elected council members will no longer be in a majority in them.
• 2] Governance and administration: The term of the ICAI’s Council will be raised from three to four years, the maximum number of consecutive terms for its elected members will be reduced to two from the current three;
• The ICAI’s Secretary will replace the ICAI’s president as its chief executive and perform the functions to be specified;
• The ICAI will appoint its auditor from the Comptroller and Auditor-General of India’s panel of CA firms;
• The Government will form a coordination committee for the ICAI and the Institutes of Cost Accountants and Company Secretaries of India.
• The Parliamentary Standing Committee on Finance has endorsed these changes and has further recommended an end to the ICAI’s monopoly in certification.

Challenges facing Chartered Accountancy and ICAI

1] Lacking critical thinking and analytical ability

• Senior industry managers say that many CAs do not have what it takes to succeed in the corporate world, i.e., analytical ability, critical thinking, appreciation of the business context, grasp of technology, and communication and presentation skills.
• CA students do not have in-class interaction.
• Also, the coaching is focused on cracking examinations rather than facilitating understanding and application.

2] Poor record in disciplining members

• The ICAI’s record in disciplining its members is even more problematic.
• There have been persistent complaints that the ICAI is lax in acting against errant members.
•  In 2018, the Government had set up the National Financial Reporting Authority as India’s first independent regulator of accounting and audit.
• The proposed changes in the composition of the ICAI’s disciplinary arms will further limit its role.
• As a result, the ICAI will be effectively reduced to an examination board.

3] ICAI failed to keep pace with changes

• The ICAI was set up in 1949, largely as the Indian version of the U.K. institute
•  Much of the work that CAs do and clamour for is a remnant of the licence raj.
• Many businesses and professions have changed beyond recognition as a result of the economic reforms initiated in 1991.
•  The demutualised and technology-driven National Stock Exchange of India has transformed stock-broking.
• Indian IT and pharma companies now compete successfully with the best in the world.
• In contrast, CA has not kept pace with the changes in India’s dynamic economy and changing society.
• Overseas accountancy qualifications such as the Association of Chartered Certified Accountants (ACCA) and Chartered Institute of Management Accountants (CIMA) are gaining popularity in India, perhaps because they are recognised worldwide, are more relevant to current and future needs, and are accepted even in India by global companies and global accounting firms.

4] Challenges posed by technology such as AI/ML

• Accounting and auditing are more amenable to the replacement of humans by technology.
• AI, robotics, and other technological advances are likely to reduce the need for human intervention in accounting.
• Also, recent administrative reforms aimed at enabling ease of doing business and ease of living, such as faceless tax assessment, easy filing of tax returns, prompt refunds, rising threshold for tax audit, and abolition of Goods and Services Tax audit have greatly reduced the availability of captive, government-mandated, make-work business for CAs.

Way forward

• Setting IIAs: The Parliamentary Committee’s suggestion to set up a string of Indian Institutes of Accounting (IIAs) on the lines of the Indian Institutes of Technology (IIT) and the Indian Institutes of Management (IIM) is innovative.
• At one level, they will end the ICAI’s statutory monopoly over certification.
• More competition should result in better quality and higher standards of conduct.

Conclusion

The Bill and the Parliamentary Committee’s report can be seen as efforts to drag the ICAI to the contemporary world. It would be wise to read the proposed changes as a warning and respond maturely.

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Context

Despite being legally mandated to keep inflation in check, RBI has persisted with easy monetary policy, even as inflationary pressures have increased. We need to understand why, and what could be the repercussions.

Inflation problem in India

• For most of the past two years, CPI (consumer price index) inflation has been hovering close to the 6 per cent upper threshold of the RBI’s target band.
• Inflation averaged 6.1 per cent during the pandemic period (April 2020 to June 2021), despite a massive collapse in aggregate demand.
• Then in January 2022, as food prices recovered, headline inflation once again crossed the upper threshold of the inflation targeting band.
• Inflationary pressures do not seem to be diminishing either. Instead, they continue to build up.
• The standard measure of inflation “in the pipeline” is WPI (wholesale price index) inflation, since price increases at the wholesale level tend to translate into retail inflation in due course.
•  Russia’s invasion of Ukraine has resulted in a sharp increase in global commodity prices, including prices of crude oil, edible oils, and fertilisers.
• Indian firms are already adapting to this situation, passing on commodity price increase to retail prices.

Issues with RBI’s stance

• Standard economics gives us a guide for how central banks should react in a situation like this.
• Two conditions: It says that monetary policy should accommodate the first round of commodity price increase, but only under certain conditions, notably that inflation is initially on target, and expectations are firmly anchored.
• But neither condition holds at present. Inflation is already too high, and so are expectations.
• An argument is nonetheless being made that monetary policy should not be tightened when inflation is driven by supply-side factors, as it can adversely impact growth.
• This is fallacious. When there are supply constraints, using easy monetary policy to boost demand is not going to boost output.
• And if firms are expecting high inflation, this will send things into a vicious spiral, as they will increase their prices even more in advance of any input price pressures.
• Surely the RBI is aware of all of this. So why is it still not acting on it?

Why RBI is ignoring inflationary pressure?

• Growth concerns: The problem seems to be that governments all over the world are worried about growth.
• The US Federal Reserve has been slow to raise rates even as inflation has reached a four-decade high. The European Central Bank has been even slower to react.
• Fiscal dominance in India: In India, monetary policy also suffers from a strong fiscal dominance.
• As a result, not only is the RBI expected to support growth, it is also expected to keep the government’s borrowing costs in check, which is in direct conflict with its inflation targeting objective.

Implications of RBI ignoring inflationary pressure

• Aggressive reduction in interest rates: A decade ago, we were in a similar situation when RBI delayed its response because it was focusing on growth.
• When inflation subsequently took off, it reached double digits and the RBI had to raise interest rates aggressively to bring it down.
• That was a very painful adjustment.
• Impact on credibility of the RBI: In addition, if the RBI does allow inflation to take off, there will be long-lasting repercussions for its credibility.
• Unachrored expectation:  if the public sees the RBI consistently ignoring inflation, expectations can rapidly get unanchored, and then it becomes very costly to bring it down.

Conclusion

To conclude, inflation is best addressed by the central bank using monetary policy, not by the government adjusting taxes. The RBI needs to urgently revisit its inflation forecast and its monetary policy stance in order to avoid potentially painful adjustments down the road.

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