RBI must be autonomous, but also accountable: Ahluwalia

Talking about demonetisation, he said the change was so huge and the need for secrecy was so great. The general assessment has been that when it was first introduced, the scale of the discomfort that will be involved or the time it will take to restore normalcy wasn’t accurately forecast, he said. There were some areas the government didn’t anticipate, like the ATM reconfiguration. “It is much better to have complete transparency. It is a good idea to change regulations rather than be rigid," he said.Below is the transcript of Montek Singh Ahluwalia’s interview to Latha Venkatesh on CNBC-TV18.Q: Let me start with first the RBI autonomy issue since the RBI unions have written to the Governor as well former Governors have raised the issue. Would you worry that the manner in which demonetisation was announced and then implemented? The RBI’s autonomy and credibility is under threat?A: This is a very important issue because globally central banks have to have very high credibility. In fact, the impact of a central bank in people’s minds very much depends on its credibility. It is unfortunate that the credibility issue has become somewhat controversial. I believe the central government has made an announcement that they have no intention of reducing the credibility or the autonomy of the central bank. That is extremely important and whatever is done in the future should, in my view, be consistent with that objective. The whole idea of having central banks and also a monetary policy committee, etc. is anchored on the notion that an independent central bank, professionally run, taking a long-term view of the monetary and financial side is something that contributes to people’s belief that the economy is going to be well-run. We cannot afford to lose that.Q: But how do you set things right at this juncture? For instance, one of the issues we realise is that the RBI board ought to have upto 10 members. But 6-7 seats lie vacant now and only three independent or external members are appointed. Should we start first by fixing that?A: Absolutely. That should be the highest priority because in a way, it is the simplest thing to fix. To some extent, the quality of the people that we appoint to the board will give a signal on how serious we are about it. So yes, that should be the first thing to be addressed. That issue has been raised, people have criticised the fact that there are vacancies and in a way that is the easiest thing to correct.Q: Dr YV Reddy, in an interview to me, raised a couple of things. One, that monetary policy is being given more status than other functions. But more particularly, he said RBI cannot be treated as just one of the regulators. One of the specific things is regulators are appointed by a committee headed by the Cabinet Secretary, now with the Governor as one of the members of that search committee. The Deputy Governor of RBI in his time, were selected by the Governor himself with another secretary not being the final voice or the chair of that committee. Do you think we should start rethinking the RBI and its autonomy at a very fundamental level, even selection of personnel?A: It is generally the case when you look at institutions that you need to look very carefully at how people are appointed. It is always a good idea to review that. I believe this more recent change where the appointment of Deputy Governor is looked at by a committee headed by the Cabinet Secretary, this is a new development, this was not the case earlier. But, a more important point is the one that YV Reddy referred to. Is the RBI just another regulator? I do not think so. The RBI is special because it is really responsible not just for monetary policy, but it should actually be responsible, in a way along with the Finance Ministry for overall financial stability. It is also responsible afterall for supervision of the banking system which is a huge part of the financial side of the economy. So, I would certainly say that anything that treats the RBI, exactly like any of the other regulators like Securities and Exchange Board of India (SEBI) that I think would not be the right thing to do. The RBI is special and that specialness should be retained. I know that there was a committee that was appointed which looked at these issues, Financial Sector Legislative Reforms Commission (FSLRC). They seem to be veering towards the direction that the RBI is just another regulator. Actually, what is important is while the RBI should be autonomous, it should also be accountable. But the accountability need not be in exactly the same way as for other regulators. For example, in the United States, the Chairman of the Federal Reserve is called by the US Congress to testify. So, there are fora where the head of the system responds to elected persons. There is nothing wrong in my view in doing that. It would be much better to accord special status to the RBI and let it be subject to being examined by some Parliamentary Committee in public in open hearings. There is nothing wrong with that.Q: So, it should be legislative changes you think or changes in convention and practice?A: In many of these things, the practice is what tends to dominate, but if you need legislation to sanctify it, there is nothing wrong with it. But one must be first clear what it is that one wants. Once you are clear about what you want, it can be done either with or without legislation. Q: Let me come to the way in which demonetisation was handled itself. What went wrong? How is it that everyone has criticised the RBI for it and it has got even the unions worried about the reputation risk that the central bank is facing. What went wrong and how should it be corrected?A: I am not in a position to judge what actually went wrong because for that, you need to have inside information of how the proposed change was discussed and how it was planned. Clearly, the very fact that a very large number of circulars, notifications had to be issued and changed and so on suggests that things were not very carefully anticipated to begin with. You can argue that the change was so huge and that the need for secrecy was so great that they had to do it on a ‘let us handle it as we go along’. But the general assessment has been that when it was first introduced, the scale of the discomfort that would be involved or the time that it would take to restore normalcy was not accurately forecast. It would have been much better in my view to make a few statements that this is going to be inconvenient, it is going to take two and half to three months or four months to fully remonetise the economy and we are doing everything we can and so on. Obviously, there were some areas where they did not anticipate. For example, the ATM issue, the issue of the size of the notes not fitting in the machines and so on. When you do things in a hurry, some of these things do happen. It is much better to have complete transparency. In that sense, I have been of the view that it is a good idea to change regulations rather than to be rigid. When you find that something is wrong, it is much better to correct it. But, given the scale of the effort, obviously, it had not been thought out for long enough.Q: Unions pointed this out as well and so did YV Reddy that the face of execution was the finance ministry officials all the time when really currency matter is entirely a RBI responsibility. So, was it wrong for this long reticence on the part of the RBI? Should it have been spearheaded by RBI officials appearing in front of the media or wherever and taking charge, was that the big mistake? In any case how are things going to be rectified hereon?A: I don’t have a strong view on exactly what would have been better. There are two separate points you are making. One is, would something else have caused less inconvenience? Short answer is, I don’t know what were the options they were considering given the time they had. Second is, given the inconvenience, should there have been a single focused point of responsibility? There my instinct is, yes it should have been. Since this is the responsibility of the RBI, it should have been the RBI or an authorised representative of the RBI who tells everything to the people that this is what happening and so on.Between the finance ministry and the RBI there are always turf battles. Each likes to get in the way of the other, that is a routine thing.Q: If the RBI has to get back the lost credibility or make good the reputation risk, you think more communication and more transparency is what the doctor orders? What is it that, that is the recipe hereon?A: We are living in a world, this is not just unwanted advice that I am giving to the RBI, I think this is unwanted advice I would give to anyone running government, in a world of social media and online reporting, every possible view on anything will get aired. I think on anything important therefore, it is very important for the official view to be constantly known so that people can weigh what is being said against what is the inside view on what is actually happening and what is intended.For example, I would say that right now, it is very important to clarify the position that are we aiming at full remonetisation of the economy or are we hoping to perpetuate to some extent a currency shortage in the belief that this will trigger digitisation.A lot of people have said that the currency shortage encouraged some people to go digital. I am sure it did, that is correct. However the question is what is our policy? Are we trying to get back to full remonetisation so that the digitisation will then be a voluntary activity or are we perpetuating a shortage in the hope that digitisation will be helped. We need a clear statement on that.Second thing I would say is that it would help a lot if the RBI were to layout a clear timeline as to when are the restrictions on the withdrawal of money in your own bank account going to be relaxed? They know how many notes they can put out. So, it seems to me that it would be a good idea if they were to say that by the end of January this is going to happen to the limits. Then if necessary week after week we are going to relax these limits and by a certain date all limits will be removed. This is very important because there is an opinion going around that the very fact that there is cash, is somehow a bad thing. If you do that then you will create tendency on the part of people to hoard cash. The ideal way of going digital is when you can get the cash if you wanted but you don’t actually want it because the digital system is working perfectly well. That should be our objective.I think the RBI if they share that view, they should come out loud and clear that that is what they are going to do.This is not making an anti-digitisation point. It is very important but it should be a voluntary process, not a forced process.Q: Demonetisation is unprecedented, a short form for currency swap, 85 percent of the currency changed. How do you think this is going to impact? Is it going to mean more people will pay taxes, more people’s audit trail is already with the government or is it going to have some serious negative consequences, what is your sense about the next 12 months?A: It is very difficult to predict about the next 12 months. However demonetisation by itself, there is no question it was a major shock to the system. If you take away 96 percent by value or 86 percent by value of the total currency, then it is going to be a shock, in the sense that liquidity is going to be strained. Now the issue there is, how big was the shock and I have not seen from the RBI or for that matter from the government a clear quantification of that.Q: RBI did say 15 basis point of this year’s GDP will be taken away, that was what they said in the December 7 monetary policy press conference.A: I must go back and look at that estimate, was that sort of a specific computation about the disruptive effect of the demonetisation or was it simply that the growth rate is going to be lowered by that much, I don’t fully remember. However whatever it is the basis for making that statement should have been made a lot clearer.Secondly to say that at the beginning of December before the extent of the shock is actually realised, there is need to review that. It is quite possible that the economic survey which is about to be presented to parliament, may be they are holding back and they will say all that in the economic survey. So, we will get a sense, that is not the RBI, that is the finance ministry but obviously they will be consulting. So, maybe the survey will give us a sense.As you know if you take 15 basis points, in other words 0.15 percent of GDP at one extreme and at the other extreme you have got investment firms, investment analysts talking about 3.5 percentage points, my own assessment was that somewhere between 1 and 2 percentage point loss of GDP in the current fiscal year. It is important to know how to measure that, that means loss compared to what it would have been without demonetisation.First of all we don’t have an assessment of what it would have been without demonetisation. We know that in the first six months the GDP had come down to about 7.1 percent or so on average. However that was decelerating. So, we don’t know independent of monetisation whether the deceleration would have stopped or continued and whether that depends on what is happening to private investment. On that the new at the moment is not all that good. We also were not sure how much that depends on what happens to the recovery of bank credit which is another big problem area.So, I would say that for a sensible quantification we need to have an assessment that in the absence of demonetisation given the point of the cycle that the economy was on GDP growth would have been “X”. Because of demonetisation it was a little lower. How much lower that is the estimate that people have to make.Second point is, you can’t just assume that the impact of the demonetisation will end with the current financial year. There will be some spill over and we don’t know again what that is. So, we need to see what would be the extent to which next year’s growth might be affected by demonetisation.Some of the things that are holding back growth have nothing to do with demonetisation. For example, if we are not able to fix the NPA problem of the banks for whatever reasons and banks are hesitant to lend which they have been, that is not going to be resolved by demonetisation or remonetisation. That needs to be resolved by addressing that problem head on.Second problem is the capitalisation of the public sector banks. We know that given the rise in NPAs, the hole in the balance sheet compared to where it has to be by 2019 or so is much larger than was earlier envisaged. So, what exactly are the plans to fill that hole? Are there any plans or we are not making any plans? These are issues which I hope the economic survey and or the Budget will provide a clear answer on. Based on that answer people will be able to judge how the Indian economy is going to perform in the course of the next year.Latha: The key takeaway is that at least the board members can be appointed immediately and the RBI can be a little more transparent and that may restore its own autonomy and credibility.