Subbarao’s tenure ‘worst era of performance by RBI governor’,says economist Panagariya

According to Panagariya,the RBI’s errors compounded the break in the growth “momentum” of the economy,caused by Jairam Ramesh when he was the environment minister,Jayanthi Natarajan,the current environment minister,and Congress president Sonia Gandhi.

He also said that he “provoked” Nobel laureate Amartya Sen to a debate on India’s economic model.

Panagariya said the RBI made a “huge mistake” in not building up dollar reserves when the rupee had appreciated sharply in 2009-10. “We could have built up our reserves. Now the war chest is too small” to fight the depreciation in the rupee,he said.

Instead,the RBI allowed Indian companies to borrow abroad liberally and raised interest rates consecutively 13 times,he said. “In a way,this new policy started with the current RBI Governor. I am sorry to say,but the timing connects to his tenure. His public pronouncements suggest to me that he really stands behind this policy,” said Panagariya.

Along with the RBI’s sustained increase in rates,the Sonia Gandhi-led National Advisory Council pushed through redistributive programmes which were inefficient and therefore hurt the economy,he said. “Her instincts are right,but the instrumentality used is very harmful,” he added.

Citing the examples of the Right to Education Act and Mahatma Gandhi National Rural Employment Guarantee Scheme,he said such programmes cost money that can only come through growth. But growth opportunities were cut because of the policy paralysis that came to characterise this government,he said. “Using the revenue that was produced by growth and then trying to run it down — this is really under-handed,” he added.

Panagariya said the debate on the Indian economy needs to be opened up to the role of the markets. Commenting on the difference between economists like him and Jagdish Bhagwati on one side (who have strongly espoused the role of free markets where better governance does not mean more governance) and Left-leaning economists like Amartya Sen on the other side,Panagariya said,“We finally provoked him… we said we will question you and you have to answer” instead of just pronouncing on ideas and positions. “Ten years ago. nobody questioned Amartya Sen. Not today. The whole debate has been unleashed,” he said.

On Prime Minister Manmohan Singh’s position in this debate,he said: “He is more of a Bhagwati… I think it is his political compulsion that has driven him to this”. He added that “a lot of the Prime Minister’s fault is that he embraced it without providing sufficient opposition… he could have made a lot better effort to persuade the Congress president that this (not pushing reforms) was not a good path”.