Rakesh Mohan, who has just announced that he is leaving his deputy governor’s perch at the Reserve Bank of India, is your ideal government economist: an expert on the subject with an impeccable academic pedigree, aware of the frontiers of the global policy debate, reformist in orientation but cautious when initiating change, and of course completely public-spirited and imbued with intellectual honesty. But I am not sure that such a person, when he outlines a “practitioner’s view” of policy issues and choices, necessarily hits all the right notes. He would be naturally constrained by the limits to free speech when he speaks from the central bank, and inevitably inclined to take a more positive view of policy responses.
Dr Mohan has faced his fair (and perhaps even unfair) share of criticism in recent months, in part because the arcane world of monetary policy has become (as he notes in the introductory chapter to this volume) a matter of lively public debate, with everyone and his uncle having a view on everything from interest rates to inflation control and currency policy. Fuel is added to this fire by the shifting currents of intellectual fashion. A single-point objective for monetary policy (targeting an inflation rate) had become the new orthodoxy until the latest financial crisis forced many to put on thinking caps again—as Dr Mohan notes.
Indian policymakers’ longstanding preferences have been out of sync with the intellectual fashion of the decidedly free-market environment of the past quarter century, whether it is monetary policy (not single-point targeting of the inflation rate), currency policy (too much of a “managed” float), reserves policy (accumulating too many dollars, thereby retarding growth), or broader financial sector policy (too statist, not capitalising on the efficiency gains that are possible from financial deregulation). But as the tide of opinion has turned in the wake of the global financial crisis, Indian policymakers don’t look any more like chaps wearing yesterday’s bell-bottoms.
It is also a fact worth noting that the debate has often been led by private sector “practitioners” who are players in financial markets, and who therefore have their own axes to grind but seem blind to potential conflicts of interest. Central bankers, in comparison, have to be circumspect.
This is the context in which Dr Mohan has put together this collection of speeches and papers, prepared over a number of years with the help of his team at RBI. They fall into two broad categories, reform of banking and finance, and monetary policy. As a compendium, though high-priced, it is a useful work for anyone who seeks an understanding of this broad subject matter. On almost every issue, you get a history of inherited positions when reform began, a summary of what has been done so far, and in most cases some idea of what further change is needed. The logic of what is spelt out is always clear, the data and charts illuminating, the risks understandable, and the judgments sensible—subject to the broad caveat that they are not critical enough. The level of argument is often quite sophisticated. And even for those who deal with these issues on an ongoing basis, there is some surprise at the re-discovery of how much banking has changed in the 18 years since 1991.
But this is also a frustrating book. The author’s general tone of satisfaction at what has been wrought runs up constantly against this reviewer’s view that more could and should have been done, and that the record is far from being as unblemished as Dr Mohan seeks to portray. Even in the immediate situation of financial crisis and an economic slowdown, the burden of Dr Mohan’s song is that India has been protected by wise policy—which is hard to square with the fact that the total flow of resources available to the commercial sector has shrunk in recent months, and that the economy has pretty much dropped to zero growth (evident if just the second half of the year is looked at for industrial performance, exports, credit offtake and other key indicators). Surely, this is not something to feel good about. As for longer-term policy issues, it is hard to not think about how much more should have been done when it comes to the development of a debt market, the level of access to institutional credit in the countryside, the cost of financial intermediation, and much else. Dr Mohan touches on these issues, but without a sense of urgency.
There is, in short, a case for much more active dissatisfaction with the current state of affairs. The broader problem with our very worthy government economists (and names are superfluous) is that they are too easily convinced that they are doing a good job, even when not much is being done.
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MONETARY POLICY IN A GLOBALIZED ECONOMY
A PRACTITIONER’S VIEW
Rakesh Mohan
Oxford University Press
328 pages; Rs 795
