Mains Paper 3: Economy | Mobilization of resources
From the UPSC perspective, the following things are important:
Prelims level: RBI functioning, reserves of RBI, Basel norms, BIS
Mains level: The tussle between RBI & the government and the need for its early resolution for sending correct signals in the economy.
The former governor of the RBI, Raghuram Rajan, has reignited the debate on the autonomy or independence of the country’s central bank by suggesting that it was perhaps an opportune time to set statutory limits to protect the term of the governor.
- He said that imposing checks on the government’s powers was important to secure operational independence and to put an end to constant interference by the sovereign, to achieve the broader objective of price and financial stability.
Need for autonomy
- Some of his predecessors, too, have in the past pitched for a secure five-year term for the RBI Governor,
- Arguing that a full service central bank — like the one India has — with a mandate not just for monetary policy but also oversight of the financial sector, besides currency management and payments and settlements, needs to be autonomous.
The conflict between the government and central bank regarding policy measures
- The bank and government have differed often over how to achieve its goals
- Especially on interest rate management
- The approach to resolving the issue of bad loans.
- It is not unusual to see such differences globally — like in the US.
- Where President, Donald Trump, unhappy with the US Federal Reserve’s stance on interest rates, has issued threats to the world’s most powerful central bank chairman, Jerome Powell.
Reasons and nature of conflicts
- These conflicts are naturally given
- The shorter political horizon of elected governments
- The need for central banks to take a non-political medium-term approach to achieve price or financial stability.
- The 2008 financial crisis further
- Underlined the importance of macro-economic stability.t
- And that the policies for achieving it are inter-linked.s
- Signalling the importance of having a strong central bank free of political compulsions.
Ways to ensure autonomy
1. Making it accountable to parliament
- One institutional response to ensure that and to shield the central bank from growing political assaults is to make it directly accountable to the Parliament without being dependent on funding,
- like the way the US Fed derives its powers from the Congress.
- But that statutory protection to the RBI and its chief must be accompanied by an accountability mechanism.
- Simply put, there is merit in central bank independence — not unbridled — as there are macro economic gains which would accrue besides boosting policy credibility.
- Ultimately, as the first Indian governor of the RBI, CD Deshmukh, said seven decades ago, it is not the constitution of the institution that matters, but the spirit in which the partnership between the ministry of finance and the bank is worked.
- The success of the partnership will, in the final analysis, depend on the manner in which the government asks to be served and provides opportunities accordingly.
- It is the display of such a spirit by any government that will be critical to the future of India’s public institutions, including the RBI.