The Tyranny Of “Experts”
The Rs1.76 lakh crore transfer by the Reserve Bank of India (RBI) is both timely and essential for furthering good governance argues Srivatsa Krishna.
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As usual a cacophony of ill-informed debate, indeed tyranny of the so-called ‘experts” is drowning out the real questions, which should be “ What are the appropriate levels of capital adequacy for the Central Bank in for a country of India’s complexities and challenges as it enters the third decade of the 21st century and what does global experience suggest?” and “What is the most appropriate use of the resources transferred?”
In their enthusiasm to win brownie points and build a public persona with the so-called ‘liberals”, the experts, many of whom are anything but that, forget four puissant facts. First, no matter what the ‘experts’ wish one to believe, the fact remains RBI is owned by Government of India (GOI). It is not autonomous in the legal sense for it is like any other public sector entity, albeit, far more important to the economy by its powers and impact. In one respect, RBI is like the Coffee Board of India, in that it is a statutory body created by an Act of Parliament and not a Constitutional body like the Supreme Court or Election Commission. Thus, RBI autonomy has nothing to do with democracy or dictatorship as is made out to be in some commentaries. Second, RBI is perhaps the only central bank in the world that enjoys the independence to set its goals (though this was approved by this Government, with inputs from RBI) and also has the freedom to choose the instruments to achieve them. No other Central Bank including the Fed and Bank of England has powers to do both- again something not well understood by the experts. They have the freedom to choose the instruments but not the goals.
Third, the liberals forget that it was the very same Arvind Subramanian who was being held up as the last word when he was criticizing India’s GDP figures, who correctly identified that RBI was sitting on way too much surplus as compared to other Central Banks. In fact, in his book, he even mentions that a former Chief Economic Advisor turned RBI Governor (no prizes for guessing who!) had written a well-argued note internally in favour of such a transfer! But he is conveniently forgotten by the liberals, in this case, for he spoke in support of dividend transfer!
Fourth, the notion of Central Bank independence itself is hotly contested and till as recently as 1997, Bank of England was not independent. Even today neither are the Central Banks of China or Singapore independent (the latter is in fact under the administrative control of their PMO and headed by a Minister!). Or Germany’s Bundesbank which is mandated to transfer almost 100% of its profits to the Government and it transferred 2.4 billion euros in 2018.
This illustrates the selective amnesia of the ‘liberal experts’ that is indeed wrenching, to say the least for it reveals that their criticisms are not based on any economic logic but “other”, maybe “political” considerations! (Somewhat similar to blaming that the Latur earthquake of 1993 or the tsunami of 2004, on whoever they dislike the most politically, in the current age and time!).
As per the Bank of International Settlements (BIS) in 2015 after Norway at 40% India was the next highest capitalized Central Bank at 32%, with the Fed and Bank way below, less than 2%! The original recommendation was to transfer significantly larger amounts, and even if that had been done RBI’s ratio would still be less than the median figure 16%, much larger than what they need for the “buffer”. So, in some ways, Central Banker’s vanity appears to often be the measure of the reserves they hold (the “Size Does Matter” argument) even though it may not be required, for central banks can’t go bust at all. Indeed, India needs a strong RBI but the key question is “how strong”?–this is something the Jalan Committee has addressed comprehensively much to the angst of professional handwringers, who forget that RBI has always been transferring dividends to GOI, and the fuss now is supposedly about the quantum alone.
The government took some recent steps including taxing foreign trusts (more perhaps an over-enthusiastic bureaucracy to fulfil some accounting or statistical requirement), criminalizing CSR shortfalls and the not-so-angel tax, which was perceived as not being conducive to the investment climate. The good news is each of these has been rectified, something not too many governments do so quickly for the right reasons- many do ‘roll-backs” under political pressures or to appease some interest group or the other, which is not the case here. There is some slowdown, and private capital investment isn’t picking up, but to guess the health of the economy using incomplete, selective, quarter by quarter data is perhaps missing the woods for the trees- its again not as alarming as the professional hand-wringers want us to believe, to justify loss of RBI’s “autonomy”, among other things!
Now comes the question of how best to use the funds? RBI’s transfer has a recurrent and a one-time component. Ideally, the one-time component of the transfer should be used for a capital purpose like to recapitalize banks, coupled with other banking reforms or to set up a new industrial investment bank to give long term finance. It should not be used to pour money through a leaking bucket- or not spend more on programs where there is a serious risk of poor delivery mechanisms not reaching the intended beneficiaries.
As an aside, why couldn’t they have come up with any number other than Rs.1.76 lakh crores!!?? Historical memory can be brutal! Let’s hope history doesn’t repeat itself, even if the number does. Indeed, as economic management and the world around us becomes more and more complex, domain expertise needs to be recognized and rewarded by Government, but at the same time, the aforementioned tyranny, nay ignorance, of the so-called liberal experts, needs to be called out too.
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