In fact, during the two tenures of the UPA government, the exasperated then Finance Minister Mr. P. Chidambaram had to concede that he would walk alone on the growth path if the apex bank was reluctant to go along with him by accommodative monetary policy through softening the policy rate. But when things went out of control in the summer of May 2012 with the abrupt announcement of the likely exit of quantitative easing or what economists dub unconventional monetary policy by the U.S Federal Reserve Chairman Ben Bernanke, all hell broke loose in emerging economies with India suffering the worst in terms of flight of capital, volatile exchange rate and a perilous spike in the current account deficit. It was at this juncture, the UPA government for all the deserved brickbats and broadsides it had to face in running a government for a decade with policy paralysis, scams and scandals in the allocation of natural resources like coal and spectrum sent its Chief Economic Adviser, Ministry of Finance Dr. Raghuram G Rajan to the Mint Street in Mumbai to preside over the affairs of the country’s central bank, the RBI. What he did in subsequent months from August before the year was over was history, with Indian economy ably steered into normalcy.

Incidentally, Rajan himself acknowledged the gravitas and the greatness of the institution he has been chosen to serve when in one of the many illustrious public lectures he had been making ever since to state at the First State Bank ‘Banking and Economic Conclave’ in Mumbai on June17, 2014 that “the RBI, despite the general deterioration in the probity of public institutions, has maintained a reputation for integrity” and must perforce have to “work on maintaining a culture, as well as service conditions, that encourage integrity”. The intellectual heft and integrity with which such a frank assessment about an 80-year old institution he is presiding over in charting a course for its bright future needs to be set in this context when allegation of rift in relationship or turf wars is doing the rounds to assault the apex bank’s well-earned functional autonomy and independence down the decades by many distinguished helmsmen at the echelons of this revered apex bank the country is genuinely proud of.

Be that as it may, there are two areas on which most of the issues of differences in perceptions seem to be assailing both. In February a momentous agreement on Monetary Policy Framework (MPF) has been signed between the apex bank and the Ministry of Finance, committing the RBI to bring inflation below 6 per cent by January 2016 with a target of 4 per cent with a band of plus/minus 2 per cent for 2016-17 and all the ensuing years. The accord also provides for the constitution of a Monetary Policy Committee (MPC) as in the UK and other European Countries which will set the monetary policy, instead of the extant practice where the RBI Governor and his deputies do in their wisdom, after taking due account of all the factors that operate in the economy. Reports are rife that there are differences with the government over the formation of the MPC with both of them not on the same page over the precise nature and composition of the proposed Committee. It needs to be noted that this major pact of binding the government to a monetary strategy through inflation-setting follows a universal trend at other major central banks in both developed and emerging economies.

Here a caveat is in order. Most of the developed economies which embraced inflation-targeting two decades ago were at their wits’ end in recent years as inflation rate and interest rates in the nadir or negative zone in the wake of quantitative easing that flooded the cheap money flow, making a travesty of any targeted inflation with too much money chasing few takers resulting in asset booms of undesirable consequence. Even the emerging economy Brazil which had continuously missed its midpoint inflation target of 4.5 per cent for two years, thanks to a distinct lack of fiscal discipline, the elixir of price stability with non-inflationary growth is a will-of-the-wisp quest. India has several unenviable parallels with Brazil on this score as the authorities have not shown any seriousness in quality fiscal consolidation up till now and the objective seems to be stoking public investment and public demand, the implied consequences of which on inflation is too visible to be vaporized in wishful-thinking a growth-crazy government is keen on persisting with for various compulsive reasons.

The onus on delivering inflation target on the apex bank alone under this odd mix of ground level realities is disproportionate to the clout and heft of the apex bank unless the authorities in the saddle also do not swerve from the quality fiscal consolidation path to bring a measure of stability to the fundamentals of the economy and the proper macro-economic milieu to ensure non-inflationary quality growth. Between the Congress penchant for inclusive growth of spending on welfare policies without ensuring the wherewithal to fund the spend and the BJP-led NDA’s façade of fiscal responsibility by spending on infrastructure, the bottom line is only expenditure and particularly in the latter when the financial institutions, both banks and long-term financial agencies get exposed, the central bank cannot but be vigilant to any vulnerability to the larger financial stability. Leave aside this vital issue, the composition and voting rights or veto power to the RBI governor are equally thorny issues where both the parties would not like to cede ground particularly the political leadership which has the indispensable remit to run the economy while the institutional regulator has only the dispensable moral authority!

On the issue of carving out a separate Public Debt Management Agency (PDMA), the RBI Governor appears to have yielded ground but with a rider that “a public debt management agency as a professional organization, independent of the central bank, independent of the government, is something that is desirable”. RBI had reconciled itself to abrogating its public debt management remit because the dichotomy in that role as the government’s sole debt manager it had to ensure money raised at low interest rates, while as a central bank battling inflation in a permanently supply-constrained nation it has to be increase interest rates was too much to sustain any longer.

All said and done, despite Mr. Jaitley’s confession that there is no “disconnect” with the apex bank over the recent functional overhauls, the need of the hour is for both to respect each other’s functional space in the best interests of running the world’s third largest economy, analysts contend. (IPA Service)