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Last Updated : Jun 24, 2019 04:47 PM IST | Source:

Monetary Policy: Viral Acharya’s parting shot

The outgoing Deputy Governor warned that public sector borrowing is close to the levels seen during the ‘taper tantrum’

Manas Chakravarty @moneycontrolcom

The news about the untimely exit of Deputy Governor Viral Acharya should spark interest in his latest pronouncements. Those who are about to resign are usually more candid.

At the last meeting of the Monetary Policy Committee, Acharya said, “Estimates of overall public sector borrowing requirement (PSBR) – which appropriately accounts for extra-budgetary resources and other off-balance sheet borrowings of central and state governments –have now reached between 8 percent and 9 percent of GDP. This is at a level similar to that in 2013 at the time of the ‘taper tantrum’ crisis.”

Comparing the situation now with that during the taper tantrum is very serious criticism. It implies that not only is growth low, but that it is government spending that has been holding up even this low level of growth. And remember that this is at a time when crude oil prices are almost half that of 2013, which is why we haven’t had a current account crisis.


Acharya’s decision to resign also explains his somewhat mystifying quotes from Hemingway’s ‘The Old Man and the Sea’. The central message of that book is of the indomitable spirit of its old fisherman hero Santiago and of his perseverance in the face of daunting circumstances. Acharya saw himself as Santiago, battling to remain true to his job at the central bank. He says in the minutes: “I found that I was speaking to myself as Santiago, the old fisherman, in ‘Old Man and the Sea’ by Ernest Hemingway: ‘It is better to be lucky. But I would rather be exact. Then when luck comes, you are ready.’”

Why is Acharya leaving the central bank? He has, of course, cited ‘personal reasons’, but we don’t have to look too hard for the real cause. His celebrated and controversial lecture ‘On the Importance of Independent Regulatory Institutions – The Case of the Central Bank’, delivered last October, started off with a quote by the head of the Argentine central bank, who resigned in protest after the government wanted to transfer the central bank’s ‘excess reserves’ to the treasury.

This what Acharya said in his speech: “My time at the central bank is up and that is why I have decided to leave my post definitively, with the satisfaction of my duty fulfilled,” Martin Redrado, Argentina’s central bank chief, told a news conference late on January 29, 2010. “We have arrived at this situation because of the national government’s permanent trampling of institutions,” he said. “Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability.”

While there can be no comparison with Argentina’s economic situation with India’s, the fact remains that the Indian government too wants to appropriate the RBI’s ‘excess reserves’ and has set up a committee for the purpose. There were widespread rumours that Acharya would quit after that speech. Indeed, after Urjit Patel’s resignation, his going was just a matter of choosing his timing. Perhaps the election results were what prompted him to go, although this is just speculation. But the quote from the Argentine central bank governor could very well apply to Acharya’s resignation.

There is little doubt that the string of high-profile exits of economic policy makers -- Raghuram Rajan, Urjit Patel, Arvind Subramanian and now Viral Acharya -- calls into question the government’s ability to stomach independent advice. But that is unlikely to unfaze the government, which no doubt has its own agenda.

Acharya’s departure will remove from the Monetary Policy Committee its most articulate hawk. In the short-run, this will make for looser monetary policy and lower interest rates. But this culling of hawks from the MPC and the RBI also removes much-needed voices of caution and checks and balances, which will be harmful in the long run.

The last MPC minutes contain Acharya’s parting advice: “The upcoming Union Budget is, therefore, key to understanding the inflation outlook, especially the response to ongoing distress in the agrarian economy, caused in part by low food prices and reflected in low rural inflation of less than two percent compared to urban inflation that remains above four percent. Would the response worsen the fiscal outlook for next year and beyond, or keep it contained through pursuit of much-needed reforms for the agricultural sector and reduction/rationalisation of other revenue expenditures? Equally importantly, the pattern of PSBR evolution during the rest of 2019-20 would also be critical for assessing the inflation outlook. Hence, the MPC needs to carefully watch out for these fiscal developments.”

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First Published on Jun 24, 2019 10:44 am
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