Stay off blow hot, blow cold policy approach: CEA to experts

Chief Economic Advisor Arvind Subramanian today called experts' bluff for "falling over backwards" to justify an official decision, which denies the government high-quality inputs, saying they should be consistent in giving feedback towards policymaking.
For one, he was critical of experts blowing hot and cold when it comes to monetary policy decisions.
"On the domestic side, there is a clear relationship between expert analysis and official decisions. Before policy decisions, the expert analysis is often illuminating. But once the decisions are taken, it is truly striking how the tune and tone of the analysis change. Analysts fall over backwards to rationalise the official decision," he said while delivering the VKRV Memorial Lecture here.

"A similar dynamics can be seen in the assessments of more recent budgets. Before the 2016-17 and 2017-18 budgets were announced, outside views spanned the spectrum," the CEA pointed out.
Some, according to Subramanian, called on the government to stick to the pre-announced target while others wanted it to go slow on consolidation. Some even asked for expanding the deficit, especially this year, given the weakness of the economy after demonetisation.
He pointed to the inconsistency in opinion of experts, which is is evident from various examples of past few months.

Citing the example of RBI monetary policy review during demonetisation, Subramanian said a consensus had built up among the investor community and economic analysts that the RBI would lower interest rates.

This consensus, he further said, was based on a declining trend in inflation from the second quarter of 2016-17 and the projected short-term adverse impact of demonetisation on growth.

It turned out that the monetary policy committee (MPC) did not cut rate, he said, adding that it rather signalled a more hawkish stance -- by going from accommodative to neutral -- and has maintained that stance since then.
"Yet, instead of criticising the official decisions, as consistency would demand, analysts found ex-post logic to attribute merit to these decisions. That is, far from criticising the central bank for holding rates constant over the past three announcements, analysts praised the policy stance as prudent and helpful in boosting the credibility of the inflation-targeting framework," he said.

The CEA noted that while the RBI's decision may well be commendable, it is odd that before December, experts saw no inconsistency between a rate cut and the credibility of the central bank.
"My claim is that experts often hold back their objective assessment. Instead, they censor themselves, and in public fora are insufficiently critical and independent of officialdom, whether the officials are in Mumbai or Delhi. To the extent they offer criticism, it is watered down to the point of being unidentifiable as criticism," he added.
He wondered as to why experts refuse to speak the truth to power.

"If you ask them, they would say they are just trying to be 'constructive'. But I feel something else is at work. For a variety of reasons, experts feel the need to stay on the right side of power - whether the RBI or the government," he minced no words.
Throwing more light on the peculiarity, Subramanian said that before policy decisions are made, observers tend to express their views that they think officials are likely to take on board. After policy actions, they try hard to endorse the decisions already taken.
"As a result, we in the government do not really benefit from their wisdom. This is a serious problem, because high- quality policymaking demands high quality inputs and high quality debates," he stressed.

"The paradox is that in other spheres - such as trade policy or development policy - one sees a more vibrant, healthy, and unself-censored debate. Why is there such little debate about macro policy? I would venture three explanations," he said.
Speaking about bankers' dilemma, Subramanian said they are careful not to get on the wrong side of the government or the RBI, because they worry about losing access and because they are regulated by them.
Quoting the famous writer Upton Sinclair, he said, "It is difficult to get a man to understand something when his salary depends upon his not understanding it."

Summing up, he said, the bottomline from this analysis is inflation pressures are easing considerably, the inflation target has been over-achieved, the inflation outlook is benign because of a number of economic developments. Real activity remains weak and well below potential, the exchange rate is appreciating, denting exports.
"Against this background, most reasonable economists would say 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 policy should get tighter," he said further.
The CEA also referred to a famous joke about asking three economists for a view and getting four different answers.

"Today, there are hundreds of economists outside the government and the RBI and several within. Instead of getting a hundred plus views, we get about ONE view, the official view. Even more interesting is that about 12 months ago, when inflation was much higher and growth was higher, there were economists who called for a large cut in interest rates. Yet today, they are silent," he said, pointing to the shift in position.
On the behaviour of officialdom, he said all they want is validation for their actions.
"So, in the short run, it will want to shape opinion in its favour. But in the long run, that is perhaps not desirable. Public interest is perhaps better served by richer debate that encompasses critical views, including of officialdom. Officials should signal that clearly," he suggested.