Flip flop over Indian central bank’s new roles/objectives..

Ever since the Budget 2015-16, there has been a lot of noise around Finance Bill which was to redefine Indian central bank’s new role. Actually the role isn’t anything new but was to become more precise and defined in form of inflation targeting.

Like all other IT central banks this would have meant RBI giving up all the powers to look at so called multiple indicators. The objective shall be just one – target inflation. Despite limitations of the IT framework which has been exposed during this crisis, we have gone ahead with the framework. Even the so called independence idea that IT central banks are more independent needs to be questioned.

But then we have gone ahead with these ideas (without much debate), so we should stick by it and make all the necessary changes required to make the framework consistent as explained here.

But  what is it that we see? The parts of Finance Bill which were to make this new policy consistent have been rolled back. Even worse is to see  experts who  hyped these changes have celebrated it as a victory of Indian central bank! They see that Indian central bank will continue to maintain its powers and not lose it to irresponsible govt. Really? This is just like the emperor’s new clothes story where the tail0r keeps fooling the king and public that there is something really fashionable the king is wearing but the reality was he was not wearing anything at all.

It seems there is limited understanding of the broader ideas around IT framework which perhaps is a failure of policymakers communication. IT is much more than just picking a numerical inflation target and somehow meeting it. There are all kinds of institutional changes required and even in central bank’s economic model as IT is based on New Keynesian ideology. So, if you go with IT implementation, it means central bank gives up most of its other roles of debt manager, forex intervener, bank regulator and so on. The idea is just that – we target inflation and nothing else.  I mean the central bank itself asked for the role by appointing a committee (whose conclusions were well known in advance) and now it seems the same changes are being blocked.  This is no RBI victory as expressed in this piece but a loss actually which is leading to all round confusion.

One does not know why these things were added to the Finance Bill if there was no agreement on what is to be done. If this article is to be believed, these provisions should not have been included in the Finance Bill at all. It is written by Saugata Roy, MP from West Bengal:

Madam, my colleague N K Premachandran has lightened my burden. I do not have to refer to the rules nor do I have to refer to the Constitution of India, which Premachandran has referred to. I do not also have to refer to Kaul and Shakdher, which is a heavy book and difficult to carry in the House.

But I do not know how an experienced lawyer like (Arun) Jaitley is making procedural mistakes again and again. I mentioned in this House, when he put the Constitution (Amendment) Bill on GST (the Goods and Services Tax), that during financial business no other Bill can be put. Ultimately, he realised that my point was correct and he did not proceed with the discussion of the Bill.

Now, we are at the stage of financial business. Today also, (the) intelligent lawyer that he is, he must have learnt of my letter to you and he has written to withdraw these clauses. What Jaitley, the experienced lawyer, has done in the Finance Bill is totally in contravention of the rules of business and the Constitution. The mandate of a Bill is to give effect to the financial proposals of the Central government for the financial year 2015-16. So, simply, it would be proposals on direct taxes, excise, customs, service taxes and all exemptions only. This Bill should have contained only these items. For the last many years of our Constitution, that has been the shape of the Finance Bill. I do not know why Jaitley made the mistake of including one Public Debt Management Agency in Chapter VII. I do not know why he included in Chapter VIII a Senior Citizens’ Welfare Fund and, why, in Chapter X, Part-2 and Part-3, he included amendments to the Forward Contract (Amendment) Act and the Securities Contract (Regulation) Act. You see Chapter IX, Part-2 and Part-3. Now, these are separate legislations. These cannot be part of the money Bill.

Premachandran has been a little harshly political. I will say it this way that the Lok Sabha has exclusive power to debate and vote on money Bills. The Rajya Sabha, of which Jaitley is a member, unfortunately does not have the power. But by this Finance Bill, he is taking away the rights of his own Rajya Sabha members because if you set up a Public Debt Management Agency, there should be a separate legislation. It should be passed by both the Houses of Parliament. If you set up a Senior Citizens’ Welfare Fund, there should be a separate legislation. It should be passed by both the Houses. Then, the Rajya Sabha will have the power to debate on it and vote on it. Then, if you amend the Reserve Bank of India Act, 1934, or the Forward Contract (Regulation) Act or the Securities Contract Act – all these would be passed by the Lok Sabha and then they go to the Rajya Sabha. As far as our tax proposals are concerned, the Rajya Sabha has no right. So, in this process, he has done that.

This is as bas as it can get. There has been so much noise around these proposals in the Finance Bill but they should not have been there in the Finance BIll at the first place!

Overall, it is really silly to see these changes not going through especially case of seperate debt management agency. This has been espoused for such a long time that it sounds a tale from Ramayana ages. Most (of not all) committees have proposed this seperation but somehow it does not get approved. What is even more interesting is same people who propose this in the committee are unsure of it on joining the central bank.

So each time, all these measures just keeps making noises and endless discussions in media. The sad reality is one does not even know whether it is a reform at all which should spice markets each time it is talked about.

Just get over it guys! Either just finish the project or discard it in dustbin..


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