India's Central Bank Must Stay Independent
Urjit Patel, the new governor of the Reserve Bank of India, has a hard act to follow. His predecessor and former boss at the central bank, Raghuram Rajan, was eminent at home and abroad, and set a high standard for talking truth to power -- which could explain why he won't be serving a second three-year term.
Patel, Rajan’s quiet and well-respected deputy at the RBI, will need to display some of the same backbone. He too will face pressure to loosen monetary policy in an effort to spur growth. He ought to meet those demands the same way: by insisting that the RBI's main job is to control inflation.
Fortunately, he's unlikely to need much convincing. He produced the report that led to the bank adopting its first formal inflation target. Consumer prices are currently rising at a rate close to the top of RBI's target range of 2 percent to 6 percent a year. Patel will conclude there's no scope for lower interest rates.
The government, though, could give monetary policy more room to maneuver by pursuing reform in other areas. For instance, upward pressure on food prices, which figure prominently in India's consumer-price index, is partly due to shortages caused by poor rural infrastructure, assorted supply-side bottlenecks and government incentives that encourage farmers to plant the wrong crops. The government has promised to do something about this. The sooner it does, the better.
Stronger fiscal discipline would also help. The government has set demanding budget targets. If it meets them, monetary policy could be relaxed. It should look for other ways to control spending as well -- for instance, by gradually eliminating subsidies for kerosene, cooking gas and fertilizers. A new national goods-and-services tax is a potential breakthrough for fiscal management: It should help revenue collection, and could be rolled out as soon as next year, though implementing it effectively will be a challenge.
Privatizing inefficient state companies would serve the dual purpose of raising money and making the economy more productive. Focusing on state-owned banks, responsible for 70 percent of lending, would yield particular benefits. Closing down or privatizing the most inefficient lenders would free up resources to recapitalize banks that have stronger foundations.
Whatever else happens, it will be crucial for the government to respect the independence of the RBI and its new governor. Rajan's departure has raised questions over this in the minds of investors. Patel is a well-qualified successor: The government made a good appointment, and should let the man it chose get on with his job. Meanwhile, it doesn't lack tasks of its own.
--Editors: Nisid Hajari, Clive Crook
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