YV Reddy on the release of his book ‘Economic Policies And India’s Reform Agenda’.
Excerpts:
The theme of fiscalisation of financial services has often figured in your speeches, like in your earlier book too. Could you explain your thoughts on this?
Basically, in the run up to the global financial crisis was that the financial sector should be left alone to chart its own course. The fiscal sector should not only keep away it should not even tax the sector. It was the mantra of progress, the way ahead at that point of time. But since then three things have happened. The first is the fiscalisation of the financial sector troubles. The prime example is the bail out of the US banks. The second is the monetary stimulus provided for the sector and the third is the temporary nationalisation of some of the banks at the cost of the taxpayers’ money. So fiscal stimulus, bail out and the expansion of the public debt to resolve the problems of the financial sector despite the impact on the public are the elements of these developments. For instance look at Iceland or Ireland before the crisis. They were following perfectly reasonable fiscal policies and look at what hit them since then.
In your book you remark that the traditional debate between rules and discretion has to be restated.
I had spoken about the rules and discretion debate in the context of the conduct of the monetary policy. Should the monetary policy only respond in a predetermined way to developments? No. This also does not mean the regulated benefits only by a strict rule based conduct of the policy·the reality is that everything cannot be set by rules. Does that put me firmly in the camp of those who advocate a discretion based system only? I don’t think so. The scope of discretion has to be regulated to develop a system that yields flexible rules and allows for constrained discretion. You will notice this means I am advocating a move away from corner solutions as an economist understands it. To take a practical example, look at the phenomena of setting exchange rates. The countries are supposed to have a free or a controlled exchange rate. The region in between was considered messy and best avoided. But see how it has panned out in practice, most countries are bunched here with hardly any one at the extremes.
In the context of the plan for new bank licenses would you say the RBI has now got the powers it needs to regulate the sector, going ahead?
When I was the deputy governor, I had often joked that don’t confuse a bank license with a driving license. The bank license is one that gives the owner the power to create money. So in the case of these licenses the fit and proper criteria has to apply. Banks have to be recognised for their special roles and therefore need a greater recognition of their abilities with the rest of the economy.
So there is an extended fiduciary responsibility and that requires ample scrutiny. Therefore they must be subject to continuous supervision. In the context of fiscalisation of the banking sector that has happened regularly in Indian history since Independence, this is a prudent caution.
You have criticised the IMF for ignoring the capital account management experience of India and China, instead calling them over regulated. Do you believe that this difference in perception has weakened and the Fund recognises the role played by RBI for instance, better now?
The IMF has an independent evaluation office. Its first chief was Montek Singh Ahluwalia. One of the reports from there has pointed out that the IMF position on promoting capital account convertibility lacks adequate theoretical justification. This is the limited point I have made in the book. The cost of building forex reserves, the IMF says is expensive but that is not based on theory and professional reasoning.