April first message

Issues the PM has to address in Mumbai

It will be interesting to hear what Prime Minister Manmohan Singh says when he addresses the valedictory event of the Reserve Bank of India’s (RBI) platinum jubilee celebrations in Mumbai on the first day of the new financial year. Will Dr Singh stick to the framework of his remarks last week at the Planning Commission where he said one should not take return to the high growth path of the past few years for granted. If he repeats the message he gave to the planners with the central bankers, he would be urging the RBI to keep its fingers on the inflation pulse. If you cannot take growth for granted, you can much less take price stability for granted. If the planners have to work hard to step up growth, the central bank will have to work hard to keep inflation under control. Expect a further hike in policy rates on April 20. There should be one more policy parameter on the prime minister’s mind when he speaks at the RBI, namely the rupee’s exchange rate. In the past few days, even as the world has been focusing on China’s yuan and awaiting with bated breath the next move of the US government on China’s exchange rate policy, the Indian rupee has exhibited signs of appreciation. If capital inflows into India continue at the pace witnessed in recent weeks, the rupee could be expected to come under upward pressure. This will be good for inflation control but not so good for exports. How much of a deterioration in the current account deficit will India be willing to live with? Should the RBI signal a view? The former governor of the RBI, Dr Y Venugopal Reddy has come out in favour of an Indian version of the Tobin tax. Even a hint that it is an idea worth considering from official quarters will have an impact on the markets. Clearly, sustaining growth while restraining inflation and ensuring exchange rate stability is going to be a tough task for the central bank and the nation’s macroeconomic authorities this fiscal.

The prime minister will also be expected to air his views on the finance ministry’s proposal for a Financial Stability and Development Council. Whatever the merits of such a Council that includes all the financial sector regulators and is chaired by the finance minister, the idea that there should be a full-time secretariat to service the council is at best hare-brained and at worst diabolical. It would end up creating a new super-finance ministry with the official running that office stepping on the toes of all the regulators, including the central bank, and his own parent ministry, the finance ministry. None of this is needed at this time. Even if there is merit in the idea of such a Council, like the National Development Council, it should meet once a year and remain a forum for discussion. There is no need for a fulltime secretariat that would step on all toes. The prime minister would be well advised to calm nerves in Mumbai by speaking like a former central bank governor and former finance minister who has keenly preserved the integrity of institutions of economic governance.