India has no stand-up economists. Not even minor versions of Yoram Bauman. Probably Indians do not miss them: they already have a good dose of stand-up comedy from central bankers who exhibit enormous self-belief and occasionally hubris. Otherwise, how can a central banker be independent?
As the modern-day central banker, she can face any challenges, even of "dosa" economics - whatever it means - and offer solutions in the manner, so to say, of a rock star. She considers herself to be a confident communicator of ideas, adviser to financial market men and regulator of banks and some financial institutions. She is frequently on the tube, in print, seminars, discussion groups and international meets. She can sprint into many subject areas - monetary and fiscal policies, corporate finance and governance, distribution economics, institutional issues and data collection. But no need to get it wrong: she is quite focused on the famous watchword of monetary policy - the letter, I, that stands for the infamous inflation. She would announce "I" target for realisation by a certain future date, usually in consultation with the government. Without realising the "I" target, there can be no growth that can be qualified as "optimal" and "sustainable" - a state of "nirvana", not a mere threshold. Why then have dual or multiple objectives and divert the attention of the central banker from pursuing the core objective? Beware of the Tinbergen rule. Also, no helicopter money and no messing up with the cash reserve ratio.
The modern-day central banker is smart enough to know that governments often indulge in excess spending, a euphemism for fiscal deficit (FD). She will point out that governments should adhere to a certain limit of fiscal deficit, placed at three per cent of the GDP (gross domestic product) in the Indian case. Why should one worry about revenue or primary deficits or structural deficit - concepts good enough for academic discussions but not for the pragmatics? It does not matter how the FD/GDP of three per cent has been "fixed". For her, FD is the main villain in the macroeconomic drama - it leads to inflation, and in normal times to external payments deficits. Has not one seen the articles by Rangarajan, Anupam Basu, Narendra Jadhav and M S Mohanty in the RBI (Reserve Bank of India) Occasional Papers on this subject? She knows the fundamental: FD contributes to inflation, cycles or no cycles of activity.
This is not it. Do not we know that FD/GDP of over three per cent raises public debt beyond "sustainable" levels, sustainability being explained by Evsey Domar, Wilheim Buiter and Olivier Blanchard? The International Monetary Fund studies placed the optimal threshold limits for debt to GDP at around 40-45 per cent for emerging economies. But does it matter so long as capital inflows take place and foreign investor confidence in the Indian economy is bullish? Don't we know that such inflows are subject to "sudden stops"?
For the central banker, solvency, so crucial for macroeconomic stability, could be realised if the friction in the form of statutory liquidity ratio (SLR) is removed to help improve credit flows and eliminate "crowding out" of private investment. It does not matter if these claims are not tested. Works of Charan Singh and M S Mohanty on the inapplicability of crowding out in India have no material significance. There is also no need to recognise the historical reality of the SLR minimising the losses of BCCI (Bank of Credit and Commerce International (overseas)) in the 1980s. For the central banker, what is relevant is the provision of liquidity in order to support credit and investment needs.
The global financial crisis of 2008 reminded central bankers to be mindful of financial stability, about which Walter Bagehot wrote in the 19th century. Till the end of 2015, we were led to believe that the financial system stability is hunky-dory. Suddenly we realise that the central bank's statements about the quality of assets and the high and growing non-performing loans of many banks have a certain cinematic ring: they are so akin to the actions of the kid who was coached to throw stones at other people's windowpanes so that Chaplin could earn a living by fixing the windowpanes. When share prices started to plummet, both the central bank and the government had to assure markets of the financial strength of banks. Is this a case of misunderstanding of the expected reactions to seemingly ill-timed and harsh-sounding policy pronouncements? Here, communication has gone haywire: it is an art that needs to be cultivated with a clear understanding of its many shades and strokes against the backdrop of a galaxy of colours.
The author is former executive director, Reserve Bank of India
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
