Dissecting policy-making

Among professional Indian economists, C Rangarajan comes next only to Prime Minister Manmohan Singh in terms of the number of years spent in economic policy-making. His professional life, like that of the PM, began in academia. Both chose to be teachers and ended up in government. Both served as governors of the Reserve Bank of India (RBI). Both worked closely together during the crisis months of 1991-92. One went on to become prime minister, the other almost became union finance minister!

But, while Manmohan Singh has never put together a collection of his speeches or policy work, Rangarajan has done so with the regularity of a tenure-track academic! This latest offering brings together essays and lectures written during the period 2000 to 2008.

What is interesting about the Manmohan Singh-Rangarajan duo is that the former is an Oxbridge Keynesian while the latter is essentially a monetarist trained in the US. Singh taught at the ‘liberal left’ Delhi School, while Rangarajan taught at the ‘conservative’ IIM-A. So, the secret of their partnership, which is now at least two decades old, is that they combine different perspectives and professional skills. No wonder Singh recalled Rangarajan to head the PM’s Economic Advisory Council (EAC), after having failed to get him on board as his finance minister.

All this is reason enough for us to read whatever Rangarajan has written. But the added reason is the fact that he writes clearly, crisply and has a point of view that he never shies away from making. He has come to epitomise traditional central bank conservatism on monetary policy and has consistently espoused moderate inflation as a primary goal of macroeconomic policy-making. While recognising the complex nature of policy choices to be made between price stability and economic growth, especially when it involves a trade-off, Rangarajan suggests that in India there is a “threshold level of inflation” that must guide policy-making.

This, as he suggested in 1998, is around 6 per cent. Other studies have preferred a range of 5 per cent to 7 per cent. Rangarajan concludes from his analysis that “while money supply may be an appropriate intermediate target when inflation rate remains high, interest rate may be more appropriate target when inflation is moderate and fluctuates within a narrow range.” (p.12)

The fact is that the long-term rate of inflation in India over three decades and more has been around 8 per cent and the “threshold” level has gone up, from a lower rate in the 1950s to much higher rates in the 1970s, and to even lower levels in the past decade. People and markets get used to changing thresholds. Policy-making can get complicated when an economy is at the cusp.

The only literary flourish in his generally prosaic prose is the title of the essay on fiscal responsibility, “The importance of being earnest about fiscal responsibility” (which is co-authored with his disciple and the present governor of RBI, Duvvuri Subba Rao). Last week, the EAC reiterated the view put forth in this chapter that “the bedrock of sustainable growth is macroeconomic stability. Maintaining macroeconomic stability, as characterised by low inflation, stable interest rates and comfortable balance of payments, is critically dependent on redressing fiscal imbalances.” (p.86)

Apart from monetary policy and fiscal policy, Rangarajan’s essays and lectures cover other topics such as the quality of Indian statistics, infrastructure policy, challenge of globalisation and exchange rate and balance of payments management. Some of the chapters in this book, like the ones on regulation of power tariffs and on issues before the finance commission, are the products of his association with policy-making in these areas. But what we get is what the author was willing to say in public at the time he was a policy-maker.

It would have been useful to students of public policy and to newer generations of policy-makers if Rangarajan had written an afterword to some of these chapters offering his critical views today, with the benefit of hindsight, on policy choices made at the time. That would have taken the literature on public policy in India forward.

Nevertheless, these are useful papers to read for students of Indian economic policy. However, given the long years of experience Rangarajan has had in policy-making, and now that he has the ears of the prime minister and the governor of RBI, it would be interesting to read a book by Rangarajan dissecting policy-making over the past two decades.

The last chapter on the global financial crisis reads almost like an afterthought. It is a brief five-page essay. Given Rangarajan’s vast experience and his ringside view of events in the past year, a longer chapter on the global financial crisis, its impact on India and lessons for Indian policy would have been a truly valuable addition to this book. The publishers could have been more diligent with the proofs and not allowed the usual typo on ‘pubic finance’ to slip through!

INDIA: MONETARY POLICY, FINANCIAL STABILITY AND OTHER ESSAYS

C Rangarajan
Academic Foundation
409 pages; Rs 995