The Indian government and the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) must sacrifice some growth in the near-term to ensure security for the economy in the long term, Viral Acharya has said.
The former central banker, who was a member of the rate-setting panel from January 2017 to July 2019 as the deputy governor in-charge of monetary policy, said India's laws spelt out clear targets for fiscal deficit and inflation and that there had been some slippages on both these fronts in recent years.
"It's been some time, I would say now probably close to 7-8 years, that we have kind of let them slip on the fiscal front. On the inflation front, maybe the pandemic shock justified letting things slips a bit. But there has to be a plan to bring them back," Acharya said on April 25 at the launch of a book on India's financial system by the International Monetary Fund in Washington.
"These (laws) very clearly lay out what the targets are, and I think the government and the Monetary Policy Committee need to make some short-term growth sacrifices – in a time when the long-term prospects for the country are very good – to secure the long-term macroeconomic balance," he said.
The Fiscal Responsibility and Budget Management Act of 2003 said the Centre must cut its fiscal deficit to 3 percent of GDP by 2008-09. However, a variety of factors mean that the target will probably be achieved with a delay of at least 20 years.
The Centre is hoping to lower its fiscal deficit to 5.9 percent of GDP in 2023-24, with the pandemic forcing the government to boost expenditure to support the economy.
The headline retail inflation has been elevated for some time now and stayed above the RBI’s medium-term target of 4 percent through the last three-and-a-half years.
The MPC has raised the interest rates aggressively in the last 12 months, increasing the repo rate by 250 basis points in 2022-23. However, the rapid rate hikes were not enough to stop the RBI from failing to meet its mandate after the September 2022 Consumer Price Index (CPI) inflation print confirmed it had stayed outside the central bank's mandated tolerance range of 2-6 percent for a third straight quarter.
One basis point is one-hundredth of a percentage point.
While the MPC can keep tightening monetary policy, it chose to keep the rates unchanged on April 6 and monitor the impact of the rate hikes made so far. Some members of the committee are also concerned about growth slowing down.
Financial sector concerns
Acharya said India's financial sector had come a long way over the last 10 years. "It has taken a massive amount of effort to clean that up. It has caused some central bankers a lot of sleepless nights; in some cases, early departures and so on," he said, without taking names.
Acharya, who is the CV Starr Professor of Economics at New York University's Stern School of Business, resigned from the RBI in July 2019 citing "unavoidable personal circumstances".
Some six months prior to that Governor Urjit Patel had resigned, again citing personal reasons. Both Acharya and Patel enjoyed a difficult relationship with the government.
At the IMF book launch, Acharya also flagged up what he thought were emerging issues in India's financial sector. One of these is the pace of the bankruptcy resolution process, which Acharya said needed to quicken.
"I am also a bit concerned whether India's largest conglomerates…whether one of their bankruptcies, either of a subsidiary or of a bank-holding company, can be handled well by the IBC or not. In that sense, maybe the true test of IBC hasn't yet happened," he said.
"There are a few conglomerates which look heavily indebted and are in a deleveraging cycle right now given that dollar funding has become tight. One way out could be to almost treat these conglomerates like systemically important financial institutions and get them to produce living bills; get them to document complex organograms, how would you ring-fence certain parts and modularly deal with a bankruptcy," he added, seemingly referring to the recent controversy surrounding the Adani group.
A second issue Acharya said he was looking at was the increasingly large role India's public sector banks were playing in the asset management space.
"I don't see why the largest asset manager should be a bank in the first place, but it seems that asset management business in India is now essentially being taken over by the banks rather than the Indian equivalents of Vanguard or BlackRock," he said.
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