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BW OPINION
A Global Central Bank?
The Indian government types never define goals or the logical path to them, and so never have to follow it. They are masters of inactivity
03 Oct 2008
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| (Pic by Subhabrata Das) |
Percy Mistry was back in town. The timing was impeccable: just a week after the crisis erupted on Wall Street. The message was unchanged: make the rupee fully convertible by 2012. The question was obvious: are you trying to give us a taste of Wall Street crises? The answer was breezy: what is a 3 per cent fall in GDP once in a decade if it gives you 3 per cent more growth all the time?
The answer would not convince the governor of Reserve Bank because his reward is independent of growth. But if there was a financial crisis and growth went down from 7 per cent to 4 per cent, he would be remembered as a disaster. The answer is also unlikely to convince the finance minister because he is encircled by bureaucrats whose mantra is stability. Growth is for the rich and the poor. The government is always in the middle; anything sensational is anathema to it. As Percy puts it, our approach to everything is meddle and muddle but stay in the middle. A memorable remark, and the meddlers will remember it. He may not care, but this government is unlikely to make him chairman of another committee, let alone give him a responsible assignment.
But Mistry had a point that might make them think: that the reserves of $300 billion that the Reserve Bank has invested abroad to earn an average return of 3 per cent are an indication that the country could afford more investment and higher growth. Such a formulation would have been too bland for him; the way he put it was that 300 billion dollars of national assets are managed by maybe 14 guys who may not at all times know what they are doing.
That was just an instance of a more general point Mistry made: that Indian government types never define goals, define the logical path to achieve them and follow it. They are masters of inactivity, and their rationale for it is always political compulsions.
How did a man who holds such heretical views ever come to be appointed chairman of an official committee? He was characteristically indiscreet about that too. It was not the finance minister or Prime Minister who wanted him. It was the financial tycoons of Mumbai who felt that they were missing out on a huge opportunity in international finance because of exchange control. They had spent much money and built those gleaming skyscrapers in the Bandra-Kurla complex, which were somehow not attracting floods of international money. What had they done wrong? Mistry told them what. But that made no difference. It is the guys in Delhi who decide the fate of the nation; and they prefer their controls to an extra couple of per cent on growth.
Mistry also resolved the mystery of his not signing the report known after him: he was being polite. Ajay Shah and K.P. Krishna wrote most of the report; if he had had his way, it would have been called the Ajay-Krishna report. That could not be done, so he did the next best thing; he did not sign. He is uncomfortable with the “personalisation”. Too bad; at least in this country, he is stuck with it for life.
So he might as well sell it; and an occasional visit to India and a stray newspaper interview is unlikely to sell it. He — or his ghost writers — needs seriously to address the question: is it possible to open the capital account and not have an occasional meltdown like the one on Wall Street? His views on the origin of that crisis were relevant: that the Federal Reserve printed far too much money, and that the regulators did not regulate the mortgage market. The lesson he drew was that regulation of liquidity needed to be internationalised: if there was going to be an international currency like the dollar, its supply could not be left to a national authority like the Federal Reserve. The Federal Reserve acted irresponsibly, and brought the entire world financial system to the brink. But it was not alone. The acceptability of the dollar brought forth the supply of pseudo-dollars such as the Euro-dollar.
So Mistry is right about the need for international regulation of currency, but it is unlikely to happen soon. Central bankers are a convivial lot; they meet in luxurious resorts at least two or three times a year and confer. They are very chummy; when the dollar got into trouble, the chairman of Federal Reserve had no difficulty in signing up credit lines of billions of dollars from his colleagues in Frankfurt and Tokyo. But could he ever agree to their jointly controlling their money supply? US Congress would never allow that. We must just accept the fact that the elephant has come to stay in our drawing room; furniture will be broken once in a while.
( Businessworld Issue 07-13 Oct 2008)
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