Central Banker: The last man standing

Ever since the global economy started its downward spiral, beginning with the housing sub-prime crisis in the USA in 2007-08, followed by the slowdown in Europe, it is the engine of emerging economies led by China that has been giving a semblance of respectability to world economy. All this time, the fraternity of economists, which includes pundits, policy makers and academicians, have been getting a lot of flak for not anticipating and predicting the current problems.There is an old joke about economists: God created the economist so that he could make weather forecasters look good. The decade of 2001-2010 was a very fortuitous one for India. The old saying, "a rising tide lifts all boats", held good for us. A buoyant global economy for most of the decade along with growth in trade and domestic demand resulted in Indian economic growth rates averaging 8 %-8.5 %, in spite of its institutional deficiencies and poor physical infrastructure. We started believing an 8% growth rate to be our birth right. But the profligacy of our political masters resulted in a big rise in the fiscal deficit. And the global conditions have resulted in a higher import bill for oil and gold and hence a higher current account deficit. And as we get into a tight spot, the policy makers have very limited scope for corrective action. If money is pumped into the economy to revive demand, there is a danger of borrowing from the future and adding to unsustainable debt burden; whereas tightening the economy to reduce the debt burden runs the risk of shrinking the economy. The central banker's response to an economic downturn assumes importance. Though the RBI (Reserve Bank of India) is an independent body that controls the monetary policy, the fact that the RBI Governor and other key officials are appointed by central government, ties the two together. In spite of pressures from different quarters over the last 12 months to reduce the interest rates and revive the slowing Indian economy, the incumbent Governor, Dr D Subbarao has shown remarkable composure in not yielding to pressure and staying the course. He has targeted inflation as his prime goal and has not been affected by frequent pressure from pursuers of growth to lower the interest rates and liberate the animal spirits of the markets. In a recent statement, the Governor said: "People who are worried about economic growth are typically quite articulate, that they have a platform to express their concerns, but people who are hurt by inflation - the large majority of the poor - their voice is not heard." The importance of economic growth in a nation's progress is undeniable. But as the last 10 years have proved, the fruits of growth are not equitably distributed. In India, the upper crust (rich and upper middle-class) retains a major share of the increase in earning power whereas the accompanying price rise hits the poor the most. Conventional thinking in 20th century India was that the rich get richer and the poor get children. But the outcome is more straightforward in current times � The rich are getting richer and the poor are getting poorer. Inflation, as Milton Friedman said, is taxation without legislation. And lower income families are most badly hurt. Dr.Subbarao's empathy for the poor and a more humane outlook towards interest rates and inflation may have more to do with his tenure as a civil servant than his training as an economist. A career that spans across different branches of government and multiple domains of public policy must surely give a bureaucrat-economist a better reading of an economic system than a pure economist. As the saying goes � If the only tool you have is a hammer, then every problem looks like a nail. This holds true for most mainstream economists who seem to look only through the prism of GDP levels andgrowth rates. Though he has been receiving some criticism for his supposedly rigid stand, history will take a better view of his display of autonomy. For this, he need not look beyond his predecessor Dr. Y V Reddy. As India was moving towards a real estate bubble in 2006-07, Dr Reddy tightened the norms for real estate lending by banks and increased the interest rates progressively. There was opposition from bankers and experts. Dr Reddy's prescience resulted in very limited damage to our economy compared to the US and some other developed nations. Dr Reddy like Dr Subbarao had been an IAS officer and served as a bureaucrat.