CEA Arvind Subramanian questions RBI status quo on rates

Subramanian criticises experts for trying to be on right side of power

Chief Economic Advisor (CEA) Arvind Subramanian on Thursday criticised the state of macroeconomic discourse in India and said experts involved in economic discussions were prone to bias and tried to justify decisions taken by the government and the Reserve Bank of India (RBI) — even if they were not correct ones — just to stay “on the right side of power”. 

Delivering the VKRV Rao Memorial Lecture in Bengaluru, Subramanian also questioned the decision of the RBI and the Monetary Policy Committee (MPC) of not cutting rates when all indicators, including core inflation, were in a steady state of decline and well within the central bank’s comfort zone.

According to Subramanian, there was a consensus after demonetisation that the central bank would cut rates, but the MPC chose to keep rates tight for several policies in a row. 

According to the CEA, “Inflation pressures are easing considerably; the inflation target has been over-achieved; the inflation outlook is benign because of a number of economic developments.”

In its April 6 monetary policy, the RBI kept repo rate unchanged, but indirectly hiked the rates by increasing the reverse repo rate by 25 basis points. 

“Against this background, most reasonable economists would say that the economy needs all the macroeconomic policy support it can get: instead, both fiscal policy and monetary policy remain tight. And on top of that, there are some officials who even think that the policy should get tighter,” Subramanian said.

In a significant comment, he said truth required diversity of opinion. While that diversity will require both competence and capability, it would also require “voices that are not silenced, compromised, or conveniently moderated by the lure or fear of power.”

In a stinging criticism of the so-called experts, Subramanian said, “It is truly striking how the tune and tone of the analysis changes and how analysts fall over backwards to rationalise the official decision.”

Subramanian said that such backtracking of views was seen before recent Budgets, including the 2017-18 one. Some economists and experts had urged the government to stick to the pre-announced target, others to go slow on consolidation. Some even asked for expanding the deficit, given the weakness of the economy after demonetisation.

“Yet whatever their initial view, once the Budget was announced, commentators almost uniformly endorsed the actual government policy. One would have thought that they would at least be mildly embarrassed by their change of views. But they gave no sign of such embarrassment; indeed, they didn’t even admit they had changed their views,” he said.

The CEA didn’t spare international ratings agencies either. He slammed credit rating agencies for not upgrading India despite clear improvement in its economic fundamentals and said they follow “inconsistent” standards while rating India and China.

“In recent years, rating agencies have maintained India’s BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance). At the same time, China’s rating has actually been upgraded to AA-, even though its fundamentals have deteriorated,” he said.

On fiscal policy, Subramanian spoke of the actions by the United Progressive Alliance in the later years of the last decade. During the economic downturn, he said, the government violated the spirit by fiscal responsibility and budget management by issuing large sums of ‘off-budget’ bonds to oil companies to window-dress the magnitude of spending stimulus, and hence the fiscal deficit.