On Thursday, delivering the VKRV Rao lecture in Bengaluru, chief economic advisor, Arvind Subramanian made a frank speech, inspirational and heroic, something one typically hear only in films not in real life. The core of Subramanian’s speech (read the full text below) are three issues:
One, Subramainan said assessments made by economic commentators and bankers are not often independent and they tend to endorse the ‘right side of power’. To get clarity, take a look at these lines from the speech.
“My claim is that experts often hold back their objective assessment. Instead, they censor themselves, and in public fora are insufficiently critical and independent of officialdom — whether the officials are in Mumbai or Delhi.” “To the extent they offer criticism, it is watered down to the point of being unidentifiable as criticism," the CEA said.
"Bankers are careful not to get on the wrong side of the government or the RBI, because they worry about losing access and because they are regulated by them."
"So, before policy decisions are taken the experts tend to express the views they think officials are likely to take. After policy actions, they try hard to endorse the decisions already taken. As a result, we in the government do not really benefit from their wisdom."
So, Subramanian’s basic point here is that experts need to speak their mind without fearing the wrath of the government, no matter how unpleasant their views are as long as they are objective assessments. Only such assessments come handy for the government to make better policy decisions. There is indeed merit in the CEA’s point. Only fearless, objective analyses not biased views can have constructive results in a democracy.
Fair advice, but only if Subramanian himself could set an example to other experts. There aren’t many examples of him doing that on critical issues. It wasn’t long ago, when the CEA publicly said he could not speak on the issue of beef ban because he could lose his job. “You know that if I answer this question I will lose my job. But thank you nevertheless for asking the question," Subramanian had said (read a PTI report here) while interacting with students of the Mumbai University in March last year.
The question to CEA then was that if the beef ban will have any adverse impact on the farmers' incomes or the rural economy, and his matter-of-fact reply was met with a round of applause, PTI reported. Beef ban is one of the major political issues the Narendra Modi government had to deal with during the first three years of its term. Politically sensitive since the BJP ruled states are in favour of beef ban and slaughter ban. Violence in the name of ‘beef eating’, including cases of murder, had raised fingers on the Modi-government.
Was Subramainan speaking his mind on an economy-related question or simply being on the right side of power when he said this?
The second point Subramanian has raised in his speech is about the credibility of global rating agecnies. "Why do we take global rating agencies seriously at all?" he asked, citing the example of how raters treat India and China differently when it comes to sovereign credit ratings. India has the lowest investment grade and the lower the grade is the higher the cost of India to secure international investments.
"The rating agencies have been inconsistent in their treatment of China and India. Given this record — what we call Poor Standards — my question is: why do we take these rating analysts seriously at all?" he said, in an apparent reference to rating agency Standard & Poor's.
Here, Subramanian has a valid point. Rating agencies’ credibility, ability to forecast economic developments (remember the utter failure of raters to foresee the 2008 global financial crisis?), rating shopping by companies and the parameters they use to evaluate sovereign ratings have received much criticism worldwide. But, if Subramanian wants to write off rating agencies that would be only a wishful thinking.
The influence these agencies command with global investors are too big to question by any developing country. Particularly for an economy like India, which still has long road ahead to command a position like what China and US enjoy, there is very little scope to ignore global raters to attract investments. India hasn’t reached a position to say that it is not at the mercy of global investors.
The third highlight of Subramanian’s speech was his heavy criticism of the monetary policy committee (MPC) and the RBI for ignoring the growth concerns of the economy by holding the interest rates for too long.
Subramanian asked whether the analyst community highlighted that we have over-achieved on inflation well in advance of scheduled targets and core inflation has been declining steadily over the last 7 months and is on target to achieve the medium term inflation target—factors that should ideally favour a rate cut.
“In sum, have they highlighted that inflation is under control and activity may be weakening, calling for all the fiscal and monetary policy support that the economy may badly need?,” he said.
Subramanian’s complaint on MPC not cutting rates in the desired manner wouldn’t have many sympathisers, who would argue that it is not lower interest rates but structural bottlenecks in the economy are the real reasons paving hurdles on the way to high economic growth.
The MPC, while holding rates for the past three reviews, had highlighted why it is important not to lower guard on inflation given the uncertainties on monsoon and other upside risks. Also, the fact that banks are yet to pass the full benefit of previous rate cuts to the end consumer too have worried the MPC.
Besides, the reason for poor credit offtake is lack of economic activities and, in turn, lack of demand from companies, not high interest rates.
As the CEA of the central government, Subramanian has every right to question the MPC’s rate decisions but he should remember that according to the formal understanding between the RBI and the government, the rate panel’s primary mandate is to keep inflation under check (it has a medium term target of (4+/-2%) and the panel has right to take steps it deems fit. It is answerable to the government and public if it fails to meet the target.
To sum up, Subramanian’s concern on high interest rates posing hurdles to India’s economic growth and blaming the MPC/ RBI for this is largely a misplaced concern, his questioning rating agencies is valid, but no emerging economy has the economic muscle power to write off global raters, till date. And, finally, his advice to experts, analysts and bankers to speak their mind and ‘not just be on the right side of the power’ is a brave advice but, it will be nice if Subramanian himself could show the way.
Here goes the full text of his bold speech:
Published Date: May 12, 2017 12:38 PM | Updated Date: May 12, 2017 12:51 PM